FDIC: 1992 - Docket No. FDIC-91-60b


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{{5-31-92 p.A-1885}}
[¶5175] In the Matter of Capital Bank, St. Paul, Minnesota Docket No. FDIC-91-60b (3-10-92).

Board adopts the recommendation of the ALJ and grants enforcement counsel's motion for summary disposition based on respondent's failure to respond to a request for admissions. Holding that the uncontested request for admissions leaves no genuine issue of material fact, the Board finds unsafe and unsound practices and issues a cease and desist order.

[.1] Practice and Procedure—Summary Disposition—ALJ Authority
FDIC rules clearly establish the authority of an ALJ to recommend an order granting summary disposition.

[.2] Practice and Procedure—Summary Disposition—Objection
Respondents, having failed to object to the motion for summary disposition at any earlier stage of the proceedings, cannot raise objection to the Board.

[.3] Practice and Procedure—Summary Disposition—Settlement Efforts
Respondent's "acceptance with qualifications" of FDIC's proposed stipulations constituted a counter-offer, not an acceptance, so there was no consent agreement.

In the Matter of

CAPITAL BANK
ST. PAUL, MINNESOTA
(Insured State Nonmember Bank)
DECISION AND ORDER
TO CEASE AND DESIST

FDIC-91-60b

Summary

The Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC" or "Petitioner") enters this Order to Cease and Desist and fully adopts and incorporates herein the Findings of Fact, Conclusions of Law, and Recommended Decision {{5-31-92 p.A-1886}}of Administrative Law Judge Steven M. Charno ("ALJ"), granting FDIC Enforcement Counsel's Motion for Summary Disposition based upon the failure of Respondent Capital Bank, St. Paul, Minnesota ("Respondent" or "Bank"), to respond to FDIC Enforcement Counsel's Request for Admissions.¹
On August 30, 1992, the ALJ issued a prehearing order established September 23, 1991, as the due date for Respondent's response to the FDIC Enforcement Counsel's Request for Admissions. ALJ Ex. No. 1. Pursuant to this order, Respondent was put on notice that a Proposed Findings of Fact made by Petitioner would be deemed uncontested if Respondent made no statement of disagreement with respect thereto or if no description of proposed evidence or legal authority was made in support of a statement of disagreement. In light of the complete absence of response to Petitioner's Request for Admissions, "there is no genuine issue as to any material fact and the FDIC is entitled to a decision in its favor as a matter of law." R.D. at 2.

Procedural History

   This case was initiated by a Notice of Charges and of Hearing ("Notice') issued by the FDIC on April 2, 1991. A timely Answer was filed by Respondent. At a Prehearing Conference held on June 17, 1991, Petitioner was ordered to file and serve a Request for Admissions in the form of Proposed Findings of Fact and Conclusions of Law, due July 15, 1991, which was timely filed. The June 17, 1991, Prehearing Order provided that a Proposed Finding submitted by Petitioner "shall be deemed uncontested if no statement of disagreement is made with respect thereto, or no description of proposed evidence or legal authority is made in support of a statement of disagreement." Respondent's response was initially due August 5, 1991, but as a result of settlement discussions between the parties, the parties stipulated that Respondent was to be given until August 12, 1991, to file its response. After a failure to bring this matter to settlement and failure to comply with the August 12 deadline, a new Prehearing Order was entered on August 30, 1991. This Prehearing Order set September 23, 1991, as the new due date for Respondent's response to Petitioner's Request for Admissions. It contained the same provision regarding the consequences of failure to respond to a Proposed Finding. No response to Petitioner's Request for Admissions has ever been filed by Respondent.
   On September 30, 1991, Petitioner filed its Motion for Summary Disposition on the basis that the uncontested Request for Admissions establishes that there is no genuine issue as to any material fact and that the FDIC is entitled to a decision in its favor as a matter of law.
   In his November 4, 1991, Recommended Decision and Order, the ALJ agreed with FDIC Enforcement Counsel and granted the Motion for Summary Disposition.

Subsequent Submissions of the Parties

This proceeding came to the Board by way of a recommended decision issued as a result of the Respondent's failure to deny the facts upon which the action is based. In essence, the ALJ issued a default decision. Respondent alleges in its Exceptions to the ALJ's Recommended Decision that the default is improper because a settlement had been agreed to by both parties. Thus, the procedural posture of this matter is confusing at best. One party claims a settlement occurred; ordinarily, the other party has no opportunity under our regulations to respond to assertions made in Exceptions; and the record up to the date of the ALJ's Recommended Decision is unclear as to exactly what transpired and contains no signed consent cease-and-desist order. Under these circumstances, the Board would be inclined to reopen the record to order a response by FDIC Enforcement Counsel to Respondent's allegations of settlement.
On December 6, 1991, however, Counsel for Respondent simultaneously filed a unilateral offer of settlement, on behalf of the Bank, and Respondent's Exceptions to the ALJ's Recommended Decision.²Although the FDIC's Rules of Practice and Procedure

¹Citations to the record shall be:
Recommended Decision "R.D. at ____."
Exceptions "Except. at ____."
Exhibits "ALJ Ex. No. ____."

²FDIC's Rules of Practice and Procedure at 12 C.F.R. §308.15 provide for a unilateral offer of settlement. (Formerly codified at 12 C.F.R. § 308.17.)
{{5-31-92 p.A-1887}}("FDIC Rules") do not provide for it, FDIC Enforcement Counsel filed Comments on Respondent's offer of settlement and a Response to Respondent's Exceptions to the ALJ's Recommended Decision on December 23, 1991. Additional submissions were made by both parties which consist primarily of arguments between the parties as to whether FDIC Enforcement Counsel has a right to respond to Respondent's Exceptions, whether Respondent's Exceptions were timely filed, and whether there has been a settlement.
To reopen the record at this time would cause further delay in the implementation of remedial and corrective action by the Respondent for which there appears to be an undisputed need.³This is not in the best interest of the Respondent, the depositors of the Respondent, the FDIC, or the public. In light of the detailed post-recommendation submissions already made by both parties, reopening the record appears to be unnecessary. The Board has the authority to request on its own motion information it deems necessary to properly decide a matter before it, 12 C.F.R. §308.4. Because the Board could have requested all of the submissions made by the parties and could have waived any regulatory time frame, it will treat these submissions as if they had been requested and timely filed, and consider them as part of the record.⁴It does so in order to eliminate a totally tangential dispute between the parties and to enable it to reach a fully informed decision following a full review of the facts and circumstances of this case.

Respondent's Exceptions

Respondent makes two assertions in its Exceptions. First, it "excepts to the legal authority of the FDIC to request that Judge Charno decide a motion for summary disposition under the facts and circumstances of this case." Except. at 1. Second, Respondent claims that the FDIC "dishonored" its contract with the Bank "When [it] chose to `revoke' its offer of settlement on or after November 4, 1991, . . . this offer hav[ing] already been accepted and the Bank ha[ving] relied to its detriment upon the offer and its acceptance." Except. at 6.
Respondent's Exceptions are blatantly disingenuous.

A. Summary Disposition

[.1, .2] The FDIC Rules clearly establish the authority of the ALJ to recommend an order granting summary disposition. 12 C.F.R. §308.29(a).⁵The cases in which administrative agencies have issued summary disposition orders are too numerous to list. The United States Supreme Court has approved the summary disposition of matters before an administrative agency. Kostle v. Pacific Legal Foundation et al., 445 U.S. 198 (1980); Weinberger v. Hynson, Westcott and Dunning, Inc., 412 U.S. 609 (1973).
Moreover, at no time prior to the filing of these Exceptions did Respondent raise an objection to or otherwise oppose FDIC Enforcement Counsel's Motion for Summary Disposition or the ALJ's authority to act on such a motion. Accordingly, Respondent can not now raise its objection to the Board. 12 C.F.R. §308.39(b), formerly codified at 12 C.F.R. §308.41(d).

B. Respondent's Contract Theory

Respondent's legal theory of contract formation is incorrect.⁶That a settlement is not reached until there is a "meeting of the minds" and both parties have affixed their signatures to a written agreement is fundamental contract law.⁷In this case, both elements of the contract are missing. There has been no meeting of the minds and no

³The fact that Respondent did not contest the factual allegations in the Notice and now claims a consent cease-and-desist order should be entered confirms that need.

⁴The documents transmitted to the Board by the ALJ constituted the original record in this case. A specific list of documents dated between September 16, 1991 and January 7, 1992, which have been included in the record and considered by the Board is attached hereto as Appendix A.

⁵Formerly codified at 12 C.F.R. §308.40(b).

⁶The case referred to by Respondent's Counsel in which she "once before [went] to the Eighth Circuit Court of Appeals on a contract issue in connection with a cease-and-desist order" is easily distinguished. In that case, there was a written, fully executed, recommended settlement agreement, a term of which the Board sought to modify before giving its final approval. Currie State Bank, Currie, Minnesota; State Bank of Rose Creek, Rose Creek, Minnesota; and Farmers State Bank of Lyle, Lyle, Minnesota v. Federal Deposit Insurance Corporation, 878 F.2d 215 (1989). The instant case never reaches that point. There is no agreement in this case.

⁷Settlement agreements such as the one at issue here are written contracts, not oral agreements. Verbal assent to the terms, had there been such assent, though perhaps probative on the issue of whether there had been a meeting of the minds, would not be evidence of the contract itself.
{{5-31-92 p.A-1888}}document has been signed by both parties.⁸
   At issue is the resolution of the Bank's board of directors authorizing the Bank's president to execute the stipulated consent agreement on behalf of the Bank. This resolution is required by the FDIC to be unqualified. The parties disagree as to whether an unqualified board resolution had been issued prior to the Prehearing Conference.
   [.3] First, the introductory paragraph of the stipulated agreement unequivocally states that is it "subject to the acceptance of this Stipulation and Consent to the Issuance of an Order to Cease and Desist (`Consent Agreement') by the Federal Deposit Insurance Corporation . . ." (emphasis added). The record before the Board is replete with statements by FDIC Enforcement Counsel to Respondent's Counsel that there has been no acceptance by the FDIC. September 27, 1991, Transmittal letter to Judge Charno; ALJ Ex. Nos. 4 and 5.
   At no time prior to the November 4, 1991, Prehearing Conference did Respondent satisfy all of the requirements of FDIC Enforcement Counsel's offer. Without such satisfaction, Respondent's "acceptance" is meaningless. An "acceptance" which does not comply with the terms of an offer is a counter-offer, not an acceptance. Respondent's Counsel mischaracterized the actions taken by her client on September 18 and October 9, 1991. Respondent's counteroffers were repeatedly rejected by the FDIC. There is no agreement.
   The resolution of Respondent's board dated September 18, 1991, is obviously qualified and unacceptable and Respondent was so informed. Attachment to Petitioner's Comments on Respondent's Unilateral Offer of Settlement. From the introductory paragraph the qualified nature of the resolution is clear:

"RESOLVED, that the Bank enter into the STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT) in the form attached to these minutes . . . that the Bank's consent to the entering of the aforesaid Stipulation and Consent is subject to the following:. . . ."
   Four paragraphs of qualifications follow this introduction.
   On October 29, 1991, FDIC Enforcement Counsel received documents from Respondent reflecting actions by Respondent's board of directors on October 9, 1991, purportedly taken to cure the defects of its September 18, 1991, resolution and to provide the FDIC with an unqualified board resolution. These documents have been correctly characterized by FDIC Enforcement Counsel as "at worst qualified, or at best ambiguous." Petit. Response. to Except. at 5. In either case, the resolution remained unacceptable, and Respondent was so informed.
   However, a letter sent to Respondent's Counsel by telecopier on October 30, 1991, requested clarification of whether the "second resolution" appearing in the October 9, 1991, minutes was adopted by Respondent. Until the very day of the hearing on FDIC Enforcement Counsel's Motion for Summary Disposition, FDIC Enforcement Counsel repeatedly informed Respondent's counsel that, if he were "advised in writing prior to the prehearing conference" scheduled for November 4, 1991, that the ambiguous language in the board's October 9, 1991, minutes had not been adopted, his "client will accept the certified Resolution and the Stipulation for purposes of settling this matter." Nov. 1, 1991 letter from FDIC Enforcement Counsel to Respondent's Counsel. No clarification or unqualified resolution was provided. The offer, by its terms, expired at the November 4, 1991, Prehearing Conference. Accordingly, there was no agreement to settle this case.
   Respondent was proceeding at its peril when it failed to file a response to Petitioner's Request for Admissions, when it failed to respond to FDIC Enforcement Counsel's Motion for Summary Disposition, and when it elected not to participate in the Prehearing Conference of November 4, on FDIC Enforcement Counsel's Motion for Summary Disposition. The ALJ's recommendation of summary disposition was justified and appropriate under the circumstances.

⁸The authority to obtain a consent to the issuance of a cease-and-desist order has been delegated to the Regional Director of the Division of Supervision pursuant to the FDIC Rules at 12 C.F.R. §303.9(b)(1). Such authority must be exercised with the concurrence of the General Counsel, or his delegate, in certain circumstances. 12 C.F.R. §303.9(b)(2). It is clear, however, that the authority to bind the FDIC resides in the Board or its delegate, the Regional Director. There can be no settlement without the approval of the Regional Director or the Board. There is no evidence of such approval in the record.
{{5-31-92 p.A-1889}}Respondent now urges that because a statement dated November 7, 1991⁹—three days after the hearing and decision by the ALJ—from Respondent's president clarifying the nature of the ambiguous language in the October 9, 1991, board minutes has been provided to FDIC Enforcement Counsel, the matter should be considered settled.¹⁰The Board disagrees.
Respondent had every opportunity to settle this case in a timely fashion. Instead, it chose to engage in remarkable foot-dragging. Respondent failed to meet the August 12, 1991, the September 23, 1991, or any other deadline established by the ALJ. Under the circumstances of this case, and in light of the frequent use of facsimile machines, overnight courier service, and the like by both parties throughout the proceedings, the fact that it took Respondent twenty days to transmit the crucial board resolution of October 9, 1991, to FDIC Enforcement Counsel is inexcusable.¹¹Essentially, Respondent seems to have adopted a strategy to delay implementation of the cease-anddesist order for as long as possible and, in the end, settle this case without participating as a litigant in the administrative process. This is conduct which the Board will not condone.
By these actions Respondent lost the opportunity to settle this proceeding by entering into a stipulated consent cease-and-desist order which it obviously believed to be more favorable than the cease-and-desist order proposed by the FDIC. Due to its own actions and inactions, Respondent must now comply with the cease-and-desist order entered in this proceeding.

ORDER TO CEASE AND DESIST

   The Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC"), having fully considered the record in this proceeding, hereby adopts the recommendation of the administrative law judge and GRANTS FDIC Enforcement Counsel's Motion for Summary Disposition.
   ACCORDINGLY, IT IS HEREBY ORDERED, that Capital Bank, St. Paul, Minnesota ("Bank"), its institution-affiliated parties, as that term is defined in section 3(u) of the Federal Deposit Insurance Act (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 regulations:
   A. operating with an excessive volume of adversely classified assets;
   B. engaging in hazardous lending and lax collection practices, including maintaining an excessive volume of adversely classified loans;
   C. operating with inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   D. engaging in violations of applicable laws and regulations;
   E. operating with management whose policies and practices are detrimental to the Bank;
   F. operating with deficient or inadequate loan documentation, including but not limited to current financial statements, insurance coverage, appraisals, title searches or legal opinions, and cash flow and/or operating information;
   G. engaging in practices which produce inadequate operating income;
   H. engaging in practices which produce excessive loan losses;
   I. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices; and
   J. paying excessive bonuses in relation to the Bank's net income and/or capital position.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and

⁹This letter was received by FDIC Enforcement Counsel on November 12, 1991.

¹⁰There is some question as to the bona fides of this letter, but the Board need not decide that issue here.

¹¹Given the history of these proceedings and the obvious ambiguity in the October 9, 1991, board minutes, Respondent's Counsel could hardly have believed that these documents would be satisfactory.
The board is aware of Respondent Counsel's Opinion of Counsel that "the stipulation and consent as well as the certificate [of resolution of the board of directors] are validly issued documents legally binding upon the Bank and its board of directors and are legally enforceable pursuant to their terms." This misses the point, however, FDIC Enforcement Counsel has not taken issue with whether they are validly issued and binding. Rather, FDIC Enforcement Counsel is not satisfied with the terms of the resolution and certificate and therefore, refused to accept them.
{{5-31-92 p.A-1890}}its successors and assigns, take affirmative action as follows:

(b) The board of directors shall in no more than 30 days from the effective date of this ORDER develop a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:

(c) The written management plan and any subsequent modification thereto shall be submitted to the Regional Director for review and comment. No more than 30 days from the receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall approve the written management plan and/or any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall implement and follow the written management plan and/or any subsequent modification.

6. Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected, unless a majority of the Bank's board of directors first (a) determines that such advance is in the best interest of the Bank, (b) determines that the Bank has satisfied the requirements set out in paragraph 5 of this ORDER as to such borrower, and (c) approves such advance. A written record of the board of directors' determination and approval of any advance under the terms of this paragraph shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the board of directors. The requirements of this paragraph do not prohibit the Bank from renewing any credit already extended to the borrower.
7. No more than 90 days from the effective date of this ORDER, the Bank shall revise its written loan policies. The revised written loan policies and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written loan policies and/or any subsequent modification thereto which approval shall be recorded in {{5-31-92 p.A-1893}}the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written loan policies and/or any subsequent modification thereto.

10. The Bank shall not pay or declare any cash dividends without the prior written consent of the Regional Director and the Commissioner.
11. During the period this ORDER is in effect, the Bank shall not pay, directly or indirectly, to any senior executive officer:

   The provisions of this ORDER shall be binding upon the Bank and its institution-affiliated parties, successors, and assigns.
   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.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 10th day of March, 1992.

/s/ Hoyle L. Robinson
Executive Secretary

In the Matter of Capital Bank St. Paul, Minnesota
FDIC-91-60b

APPENDIX A

September 16, 1991	Letter from FDIC Enforcement Counsel to Respondent's Counsel
	transmitting proposed Order to Cease and Desist, Stipulation and
	Consent to Issuance of an Order to Cease and Desist, and Certif-
	icate of Adoption of Resolution.
September 24, 1991	Letter from Respondent's Counsel to Judge Charno and FDIC
	Enforcement Counsel.
September 27, 1991	Letter from FDIC Enforcement Counsel to Judge Charno trans-
	mitting Petitioner's Motion for Summary Disposition and Brief in
	Support.
October 9, 1991	Minutes of Respondent's board of directors meeting (2 pages).
October 10, 1991	Certificate of Adoption of Resolution.
October 28, 1991	Letter from Respondent's Counsel to FDIC Enforcement Counsel
	transmitting Stipulation and Consent to Issuance of an Order to
	Cease and Desist, Certificate of Adoption of Resolution and Opin-
	ion of Counsel.
October 30, 1991	Letter from FDIC Enforcement Counsel to Respondent's Counsel.
November 1, 1991	Letter from FDIC Enforcement Counsel to Respondent's Counsel.
November 1, 1991	Letter from FDIC Enforcement Counsel to Respondent's Counsel.
November 4, 1991	Letter from Respondent's Counsel to Respondent (Craig Mathies)
	transmitting the November 1 letters from FDIC Enforcement Coun-
	sel and a new draft board resolution.
November 7, 1991	Letter from Respondent's Counsel to FDIC Enforcement Counsel
	transmitting November 7, 1991 letter from Respondent's Chair-
	man.
November 14, 1991	Letter from Respondent's Counsel to Judge Charno.
November 20, 1991	Letter from FDIC Enforcement Counsel to Judge Charno.
December 6, 1991	Respondent's Unilateral Offer of Settlement; Respondent's Ex-
	ceptions to the ALJ's Recommended Decision.
December 23, 1991	Petitioner's Comment on Unilateral Offer of Settlement by Re-
	spondent with unsigned Certificate of Adoption of September 18,
	1991 board resolution attached; Petitioner's Response to Respon-
	dent's Exceptions.
December 24, 1991	Letter from FDIC Enforcement Counsel to FDIC Executive Sec-
	retary transmitting correction to Petitioner's Response to Respon-
	dent's Exceptions.
December 30, 1991	Letter from Respondent's Counsel to FDIC Executive Secretary
	transmitting affidavit and seeking clarification of FDIC Enforce-
	ment Counsel's authority to respond to Respondent's Exceptions.

January 3, 1992	Letter from FDIC Enforcement Counsel to FDIC Executive Sec-
	retary responding to Respondent counsel's December 30, 1991
	letter.
January 7, 1992	Letter from Respondent's Counsel to FDIC Executive Secretary
	responding to FDIC Enforcement Counsel's January 3, 1992 let-
	ter.

__________________________________________
RECOMMENDED DECISION

In the Matter of
Capital Bank
St. Paul, Minnesota
(Insured Nonmember State Bank)
Steven M. Charno, Administrative Law
Judge:
This matter was initially instituted by the issuance of a Notice of Charges by the Federal Deposit Insurance Corporation ("FDIC") on April 2, 1991, and a timely answer was filed by Respondent. At a prehearing conference held in this matter on June 17, 1991, Petitioner was ordered to file and serve a Request for Admissions in the form of Proposed Findings of Fact and Conclusions of Law, due July 15, 1991, which was timely filed. The June 17, 1991 Prehearing Order provided that Proposed Finding submitted by Petitioner shall be deemed uncontested if no statement of disagreement is made with respect thereto, or no description of proposed evidence or legal authority is made in support of a statement of disagreement. Respondent's response was initially due August 5, 1991, but by Stipulation due to settlement discussion between the parties, the time for Respondent to file its response was extended to August 12, 1991. After a failure to bring this matter to settlement and failure to comply with the previous prehearing order, a new prehearing order was entered on August 30, 1991. The August 30, 1991 prehearing order set the date of September 23, 1991 as the due date for Respondent's response to Petitioner's Request for Admissions, with the same provision that a proposed finding shall be deemed uncontested if no statement of disagreement is made with respect thereto or no description of proposed evidence or legal authority is made in support of a statement of disagreement. No response to Petitioner's Request for Admissions has ever been filed by Respondent. On September 30, 1991, Petitioner filed its Motion for Summary Disposition on the basis that the uncontested Request for Admissions establish that there is no genuine issue as to any material fact and that the FDIC is entitled to a decision in its favor as a matter of law. Respondent has filed no response to this Motion for Summary Judgment. I therefore grant Petitioner's Motion for Summary Disposition and make the following Findings of Fact and Conclusions of Law in conformity with: the prehearing order of August 30, 1991; section 308.23(d)(2) of the FDIC Rules and Regulations, 56 Fed. Reg. 37,968, 37,981 (1991) (to be codified at 12 C.F.R. §308.23(d)(2)); and section 308.29(d) of the FDIC Rules and Regulations, 56 Fed. Reg. 37, 968, 37, 983 (1991) (to be codified at 12 C.F.R. §308.29(d)). The numbering system employed first sets for the number for grouping the statements under each subheading, followed by a period and the numbered finding; for loans, the second number groups all statements related to the identified loan, and third number for each statement related to each loan.

FINDINGS OF FACT

Jurisdiction

   1.1. The above captioned matter was commenced by the issuance of a Notice of Charges and of Hearing to be served upon Capital Bank, St. Paul, Minnesota ("Bank"), issued on April 2, 1991.
   1.2. The Bank was duly served with a Notice of Charges on April 5, 1991.
   1.3. The Bank is a corporation existing and doing business under the laws of the State of Minnesota.
   1.4. The Bank has its principal place of business at St. Paul, Minnesota.
   1.5. The Bank is, and has been, at all times pertinent to this proceeding, an insured state nonmember bank.

Hazardous Lending and Lax Collection Practices

Adversely Classified Loans

2.1. The FDIC Manual of Examination Policies in effect as of August 11, 1990, provides for three possible adverse classifications of loans, "Substandard," "Doubtful," and "Loss."
{{5-31-92 p.A-1897}}2.2. The three possible adverse classifications of "Substandard," "Doubtful," and "Loss" are defined in the FDIC Manual of Examination Policies in effect as of August 11, 1990, as follows:

   2.3.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $139,150. (All following requests for admission in the form of proposed findings of fact numbered 2.3.2. through 2.3.50. refer to this loan as of August 10, 1990.)
   2.3.2. This loan was delinquent since March 1, 1990.
   2.3.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC Examiners as $139,000 "Doubtful."
   2.3.4. This loan was previously classified $184,000 "Substandard" at the last State examination.
   2.3.5. The borrower was a commercial real estate developer in Minnesota and Florida before his death in May, 1990.
   2.3.6. The borrower had been a borrower of the Bank since July 1983, and purchased an interest in the Bank's holding company on November 4, 1988, for $73,000.
   2.3.7. The sum of $139,150 is the balance of a 1-year single pay not for $151,561, dated May 2, 1990, at prime rate.
   2.3.8. The difference between the outstanding balance and the note amount represents accrued interest previously uncollected.
   2.3.9. The May 2, 1990 note renewed two unsecured notes, dated November 2, 1988 and November 3, 1988, respectively, with a combined balance of $183,650.
   2.3.10. The $183,650 debt was reduced $44,500 at this May 2, 1990 renewal, when the Bank purchased the borrower's partnership interest in Expressway Industrial Park at Columbus, Georgia, for $89,000.
   2.3.11. The remaining $44,500 from this $89,000 purchase was given to the borrower and used to pay other debt.
   2.3.12. The Bank subsequently resold the borrower's partnership interest to another partner in Expressway Industrial Park for $89,000.
   2.3.13. The collateral for this loan consists of a May 5, 1990 assignment of a $243,800 note from * * *.
   2.3.14. The Bank does not have the * * * note and Bank management stated to the FDIC examiners that said note does not exist.
   2.3.15. The borrower's most recent income information on file with the Bank is limited to copies of the first two pages of debtor's 1987 income tax return.
   2.3.16. The borrower's 1987 tax return showed interest income of $179,600, real estate income of $184,300, miscellaneous income of $34,900, alimony expense of $35,600, resulting in an adjusted gross income of $5,400.
   2.3.17. A review of the borrower's outdated January 1989 self-prepared financial statement discloses (a) no contingent liabilities, (b) a substantially illiquid asset structure relative to total liabilities, and (c) assets primarily comprised of investment in various real estate projects and businesses for which there is no information of appraisals to support asset valuations.
   2.3.18. The borrower's January 1989 financial statement on file with the Bank val- {{5-31-92 p.A-1898}}ued at 1/3 interest in * * * at $205,000, but the Bank purchased that interest for $89,000.
   2.3.19. The borrower indicated on his January 1989 financial statement a 25 percent interest in * * * valued at $600,000.
   2.3.20. Bank management indicated to FDIC examiners that (a) half of that indicated 25 percent interest in * * * has since been sold and (b) * * * has an option to purchase the other half of said 25 percent interest for $150,000, which he has not exercised.
   2.3.21. Bank management stated to FDIC examiners that the Bank has been unable to obtain a list of assets held by the borrower's estate because it is still in probate.
   2.3.22. The Bank's loan file for this loan contains an unexecuted agreement dated July 1989 between the borrower and * * *.
   2.3.23. The borrower and * * * were business partners of long standing.
   2.3.24. This * * * agreement was to be a liquidation of the various joint ventures between the two individuals or their related interests.
   2.3.25. As part of this agreement * * * was to assume and hold the borrower harmless for certain loan guarantees made by the borrower.
   2.3.26. This * * * agreement discloses approximately $2,950,000 of guarantees outstanding on four business ventures plus the guarantees for residential land development loans made for the benefit of * * *, and * * *.
   2.3.27. This * * * agreement does not disclose the dollar figures for the land development loan guarantees.
   2.3.28. The financial strength of the entities for which the borrower provided guarantees is not known.
   2.3.29. Senior Vice President Misenor indicated to FDIC examiners that the borrower's guarantees were being used in order to obtain bank financing for * * * and the related business activity.
   2.3.30. Executive Vice President Mathies indicated to FDIC examiners that the Bank is relying on the borrower's remaining 12.5 percent stock interest in * * * to repay the debt.
   2.3.31. The borrower was one of the four original stockholders in * * *.
   2.3.32. * * * is a borrower at the Bank and the only surviving partner in * * *.
   2.3.33. * * * is negotiating settlements with the estates of the other partners.
   2.3.34. * * * owned 65 acres of land on the interchange in Hudson, Wisconsin, which is the site of a new dog racing track in the process of construction.
   2.3.35. Bank management reports to the FDIC examiners that (a) a number of businesses, including restaurants and hotels, have already purchased land from * * * and (b) that * * * projects to net $1 per square foot for the remaining land.
   2.3.36. The Bank has not obtained documentation to support the Carmichael sales.
   2.3.37. Executive Vice President Mathies stated to FDIC examiners that the reason the Bank purchased the partnership interest in * * * from the borrower was to provide funds for the borrower's wife.
   2.3.38. The borrower was to give the * * * stock to the Bank as a reduction and restructure of this loan.
   2.3.39. These restructure transactions were arranged for the borrower by his attorney * * *.
   2.3.40. The borrower died several days after selling the * * * partnership interest to the Bank, but prior to executing documents involved in the restructure of this loan.
   2.3.41. Executive Vice President Mathies indicated to FDIC examiners that the * * * stock is in attorney * * *'s possession.
   2.3.42. Recent correspondence between the Bank and * * * has been unproductive and this loan is basically unsecured.
   2.3.43. This loan restructure involved both the borrower and * * * as well as six area banks.
   2.3.44. * * * has defaulted on his debts to other banks.
   2.3.45. The lack of adequate collateral, poor performance, and the borrower's inability to repay makes collection of this loan doubtful.
   2.3.46. The originating officer of this loan was former loan officer Whelan.
   2.3.47. The servicing officer of this loan was bank officer Misenor.
   2.3.48. The adverse classification of this loan as "Doubtful" by the FDIC examiners was reasonable under all of the above circumstances.
   2.3.49. This loan exhibits hazardous lending and lax collection practices of:

   2.3.50. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.4.1. As of August 10, 1990, the Bank has outstanding loans to * * * with a total unpaid balance of $667,305. (All following requests for admission in the form of proposed findings of fact numbered 2.4.2. through 2.4.43., refer to this loan as of August 10, 1990.)
   2.4.2. These loans were adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC Examiners as $22,000 "Loss" and $645,000 "Substandard."
   2.4.3. These loans were classified "Substandard" in the amount of $625,000 on the Bank's watch list.
   2.4.4. These loans were classified "Substandard" in the amount of $638,000 at the last State examination.
   2.4.5. The sum of $23,000 is the balance of an unsecured note that has been renewed three times since the original June 30, 1987 advancement of $25,000.
   2.4.6. The Bank's loan file comments state repayment of this unsecured loan was to occur from investment property income or sale of real estate.
   2.4.7. The sum of $19,000 is the balance of a note that originated December 5, 1986 at $25,000.
   2.4.8. The collateral for this $19,000 loan is a junior lien on a rental duplex.
   2.4.9. A December 1986 Bank prepared appraisal assigns a $75,000 value to this rental duplex.
   2.4.10. The 1986 Bank appraisal of this duplex does not provide a breakdown of values assigned to land and building.
   2.4.11. The assessed tax value on this duplex was $56,700.
   2.4.12. A first real estate mortgage of $42,000 on this duplex is held by a different lendor.
   2.4.13. The collateral protection provided by the $19,000 junior real estate mortgage on this duplex is inadequate.
   2.4.14. A note originated at $630,000 on September 28, 1989, with loan proceeds used to purchase the former * * * property, is secured by a first real estate mortgage on said property.
   2.4.15. The purchase price for the * * * property was $680,000, with the borrower providing a $50,000 down payment.
   2.4.16. The terms of the $630,000 note provide for a 25-year amortization with an interest rate of 9 percent, with the unpaid balance due at the end of 6 years.
   2.4.17. Under the terms of the $630,000 note, the Bank will give the borrower a credit of $40,000 if the principal balance of this note is paid within the first year.
   2.4.18. If the principal balance on this $630,000 note is paid within 2 years, the Bank will give the borrower a credit of $25,000.
   2.4.19. Under the terms of the $630,000 note, if the borrower, at the end of 6 years, is unable to obtain financing at another institution, the Bank will continue financing for an addition 4 years with interest at two points above prime rate, adjusted annually.
   2.4.20. The borrower was not charged any points, closing costs, or other fees in acquiring this $630,000 loan.
   2.4.21. The 9 percent interest rate on this $630,000 note was below the prevailing mortgage interest rates at the time said note originated.
   2.4.22. The below market financing of this $630,000 note makes Accounting Principles Board Opinion 21 ("APB 21") applicable to this transaction.
   2.4.23. Comparable loans originated by the Bank, at approximately the same time as this $630,000 credit, were made at 12.5 percent.
{{5-31-92 p.A-1900}}
   2.4.24. The $22,000 classified as "Loss" on the borrower's loans represents the discounted repayment of the $630,000 loan according to APB 21.
   2.4.25. The collateral for the borrower's $630,000 loan is a first mortgage on two commercial buildings, one at 790 Grand Avenue and one at 64 South Avon Street, both in St. Paul, Minnesota.
   2.4.26. The Grand Avenue property securing this loan is a commercial building with 16 apartments and five commercial spaces.
   2.4.27. The South Avon Street property securing this loan is a 6-unit apartment building.
   2.4.28. A November 13, 1989 appraisal in the Bank's files assigns an $885,000 value to these two properties.
   2.4.29. Based on the $680,000 purchase price of these two properties, 92 percent of their acquisition cost was financed.
   2.4.30. The Bank's credit file comments for this borrower, prepared by chief lending officer Misenor, identify the borrower's total liabilities of $165,600, as disclosed on his "net" financial statement.
   2.4.31. The supplemental schedules attached to the borrower's property or financial statement in the Bank's credit file shows an asset "investment properties" as having a disclosed value of $1,436,000 with associated liabilities of $976,900.
   2.4.32. The FDIC's adjustment of the borrower's property or financial statement to reflect total assets and total liabilities, on a gross basis, shows $2,280,000 in assets and $1,142,500, in liabilities.
   2.4.33. The borrower's high level of liabilities is greatly disproportionate to his very limited amount of liquid assets.
   2.4.34. The Bank had no income information on the borrower.
   2.4.35. The borrower's ability to service more than 1.1 million dollars in debt was not documented by the Bank.
   2.4.36. The borrower's contingent liabilities had not been disclosed to the Bank.
   2.4.37. The borrower's financial statement was not adequately reviewed by the Bank's chief lending officer.
   2.4.38. These loans involve unsecured debt, and debt collateralized by real estate that provides inadequate collateral protection.
   2.4.39. The borrower is highly leveraged, with nominal liquidity, and his ability to service the debt owed is undocumented.
   2.4.40. The loan officer for these loans was officer Misenor.
   2.4.41. The adverse classifications of these loans as $22,000 "Loss" and $645,000 "Substandard," by the FDIC examiners was reasonable under the above circumstances.
   2.4.42. These loans exhibit hazardous lending and lax collection practices of:

   2.4.43. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.5.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, a real estate investment partnership with an unpaid balance of $597,902, of which $97,902 is "nonledger debt." (All following requests for admission in the form of proposed findings of fact, numbered 2.5.2 through 2.5.41, refer to this loan as of August 10, 1990.)
   2.5.2. The partners of * * * are * * *, * * *, * * *, * * *, and * * *.
   2.5.3. As of August 10, 1990, this loan was delinquent by 213 days.
   2.5.4. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC Examiners as $500,000 "Loss."
   2.5.5. This loan was listed as "Substandard" on the Bank's watch list.
   2.5.6. This loan was classified $498,000 "Substandard" and $100,000 "Loss" at the last State examination.
   2.5.7. This loan was classified "Substandard" in the amount $598,000 at the last FDIC examination.
{{5-31-92 p.A-1901}}
   2.5.8. This loan originated at $600,000 on February 15, 1985, with proceeds used in the purchase of the property known as * * * from * * *.
   2.5.9. The terms of the purchase of * * * consisted of a $482,000 cash payment, assumption of a $2,082,000 first real estate mortgage and a 3 percent acquisition fee.
   2.5.10. The collateral for this loan originally consisted of promissory notes in the amount of $47,000 from each partner of the borrower, payable to the borrower, and a $370,000 surety bond.
   2.5.11. Inadequate cash flow from the * * * Building resulted in the borrower filing bankruptcy and the said borrower was dissolved.
   2.5.12. When the Bank attempted to collect on the $370,000 surety bond securing this loan, the insuring company refused to honor the said bond because it had been issued by an unauthorized agent.
   2.5.13. As of August 10, 1990, the Bank's efforts to recover under this $370,000 surety bond had been unsuccessful.
   2.5.14. This loan had previously been restructured and extended on March 19, 1988.
   2.5.15. As part of the March 19, 1988 restructuring of this loan, * * * the principals of which are * * * and * * *, provided the Bank a junior real estate mortgage on 57 acres of undeveloped land in Eagan, Minnesota.
   2.5.16. As of August 10, 1990, the Bank had not obtained a title opinion on the * * * property securing this loan.
   2.5.17. The Bank's lien position in this * * * mortgage securing this loan is junior to (a) a $2,200,000 first real estate mortgage; (b) a $271,000 second real estate mortgage held by a local savings and loan association; and (c) a $50,000 third real estate mortgage held by the law firm * * *.
   2.5.18. Default has occurred on the first and second * * * mortgages described in request 2.5.17 (a) and (b) above, and the lien holders have foreclosed on the property.
   2.5.19. The Sheriff's sale on the first * * * first mortgage described in request 2.5.17 (a) above, occurred January 22, 1990, with the lien holder bidding $2,400,500.
   2.5.20. The Sheriff's sale on the second * * * second mortgage described in paragraph 2.5.17 (b) above, occurred February 8, 1990, with the lien holder bidding $286,200.
   2.5.21. The dollar size of the prior mortgage on the * * * property securing this loan is prohibitive to the Bank redeeming the said mortgages to protect its collateral position.
   2.5.22. A July 1988 property or financial statement in the Bank's loan file on * * * lists total assets of $3,992,700, with a net worth of $3,228,900.
   2.5.23. * * *'s major assets are listed in this July 1988 statement as real estate partnerships of $1,318,500, * * * at $1,033,000, and a homestead at $1,150,000.
   2.5.24. Liquid assets for * * * listed on this July 1988 statement are limited to $11,000 cash and $6,000 cash surrender value on a life insurance policy.
   2.5.25. An October 1, 1988 property or financial statement on * * * in the Bank's loan file lists total assets of $3,189,100, and a net worth of $2,537,900.
   2.5.26. Major assets of * * * are listed in this October 1988 statement as business interests and partnerships valued at $2,187,500, and a homestead at $485,000.
   2.5.27. Liquid assets for * * * listed in this October 1988 statement are limited to $12,100 in cash.
   2.5.28. A May 18, 1989 property or financial statement on * * * in the Bank's loan file lists total assets of $798,000, and a net worth of $251,000.
   2.5.29. * * *'s major asset listed in this October 1988 statement is a homestead valued at $600,000.
   2.5.30. A February 1988 property or financial statement on * * * in the Bank's loan file lists total assets of $4,283,000 and a net worth of $2,855,000.
   2.5.31. * * *'s major asset listed in this February 1988 statement as an equity interest in real estate valued at $3,442,000.
   2.5.32. * * * was no longer viewed by the Bank as active in the development of the borrower's property or as a source of repayment for this loan.
   2.5.33. The illiquid position of the former partners of the borrower raises doubt about these individuals' ability to personally repay this loan.
   2.5.34. President Donohoo stated to the FDIC examiners that the Bank will be rein- {{5-31-92 p.A-1902}}itiating legal action to collect this loan under the $370,000 surety bond securing this loan.
   2.5.35. Donohoo stated to FDIC examiners that if legal action on the surety bond securing this loan proves unsuccessful, the Bank would take legal actions to collect from the individuals who were the borrower's partners.    2.5.36. The originating officer for this loan was former Executive Vice President Summers.    2.5.37. The servicing loan officer for this loan was Vice President McWilliams.
   2.5.38. Given the lack of collateral, the extreme past due status, and the past inability to collect monies from the insurance company or guarantors, a "Loss" classification was assigned to the loan by the FDIC examiners.
   2.5.39. The classification of this loan as $500,000 "Loss" by FDIC examiners was reasonable under all of the above circumstances.
   2.5.40. This loan exhibits hazardous lending and lax collection practices of:

   2.5.41. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.6.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, a real estate developer, with an unpaid balance of $110,250. (All following requests for admissions in the form of proposed findings of fact numbered 2.6.2. through 2.6.25. refer to this loan as of August 10, 1990.)
   2.6.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC Examiners as $110,000 "Substandard."
   2.6.3. This loan was internally classified "Substandard" in the amount of $75,000 on the Bank's watch list.
   2.6.4. This loan originated on May 27, 1988, in the amount of $75,000.
   2.6.5. Proceeds of this loan were used to finish construction of a "spec" house to be offered for sale.
   2.6.6. Repayment of this loan was to have occurred by the borrower acquiring permanent financing that was never obtained.
   2.6.7. The collateral for this loan was a junior real estate mortgage on another dwelling owned by the borrower.
   2.6.8. A $1,150,000 first real estate mortgage on the collateral securing this loan is held by another lendor.
   2.6.9. The first lien holder's mortgage covers the entire development in which the Bank's collateral for this loan is located.
   2.6.10. The Bank negotiated a partial release from the holder of the first mortgage on this collateral by paying $36,000 to that mortgage.
   2.6.11. The $36,000 payment described in request 2.6.11 above, was added to the principal balance of this loan.
   2.6.12. The borrower's chronic delinquency in making payments on this loan resulted in the Bank foreclosing on the collateral for this loan with the sheriff's sale occurring on June 27, 1990.
   2.6.13. The collateral for this loan is encumbered by unpaid property taxes of $2,500.
   2.6.14. A Bank prepared appraisal based on the property tax statement for this property assigns a value of $132,800 to the property securing payment of this loan.
   2.6.15. Based on this $132,800 value, the property securing this loan does not provide strong collateral protection to the Bank.
   2.6.16. The Bank had no current financial information on the borrower.
   2.6.17. Bank management reported to the FDIC examiners that the borrower is financially distressed and in the process of liquidating holdings.
   2.6.18. A title insurance policy commitment in the Bank's loan file shows that $874,800 in judgments have been filed
{{5-31-92 p.A-1903}}against the borrower involving 12 different creditors.
   2.6.19. As of August 10, 1990, the dwelling that serves as collateral for this loan was used as a rental unit.
   2.6.20. Rents received from this dwelling are being applied to payment of this loan.
   2.6.21. The originating officer of this loan was Whalen.
   2.6.22. The servicing officer for this loan was Misenor.
   2.6.23. Under all the above circumstances, the adverse classification of this loan as $110,000 "Substandard" by FDIC examiners was reasonable.
   2.6.24. The loan exhibits hazardous lending and lax collection practices of:

   2.6.25. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.7.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, Attorney, with an unpaid balance of $76,337. (All following requests for admission in the form of proposed findings of fact numbered 2.7.1. through 2.7.23. refer to this loan as of August 10, 1990.)
   2.7.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC Examiners a $73,000 "Substandard."
   2.7.3. This loan was not on the Bank's watch list.
   2.7.4. The balance of this loan is from a renewal note dated May 15, 1989.
   2.7.5. The original advances later resulting in this renewal note were made in 1987 and 1988.
   2.7.6. The original advances made in 1987 and 1988 to the borrower were on an unsecured basis, with the loan proceeds used for personal investments.
   2.7.7. On May 15, 1989, the Bank obtained security for this loan by a junior real estate mortgage on a condominium unit.
   2.7.8. A first mortgage on this condominium unit is for $73,000 and is held by another mortgage.
   2.7.9. Bank management did not know the balance of this first mortgage on the condominium unit securing this loan.
   2.7.10. An appraisal of this condominium unit prepared by Bank officers assigns a value of $134,000.
   2.7.11. The methodology used by the Bank officers in determining the value of this condominium unit was based on the 1989 property tax statement for said unit.
   2.7.12. The collateral protection provided to the Bank on this loan by the junior real estate mortgage on this condominium unit is not (a) adequately documented and (b) is not sufficient to protect the Bank from loss on this loan.
   2.7.13. At the time the Bank acquired the junior real estate mortgage on the condominium unit securing this loan, the borrower had not paid the property taxes for said unit for the previous three and one-half years.
   2.7.14. An April 23, 1990 property or financial statement on the borrower contained in the Bank's file lists total assets of $2,415,000, total liabilities of $1,033,000, and a net worth of $1,357,000.
   2.7.15. The borrower's major assets listed on this April 1990 statement in the Bank's file include three real estate properties valued at $1,725,000, a homestead valued at $240,000, and his investment in his law firm at $175,000.
   2.7.16. This April 1990 statement of the borrower discloses that the borrower has monthly debt service requirements of $11,700 or $140,400 annually.
   2.7.17. The borrower disclosed in this April 1990 financial statement his salary of $125,000, and real estate income of $30,000.
   2.7.18. The borrower's level of income is inadequate to meet the $140,400 annual debt service that is required.
   2.7.19. The originating officer for this loan was officer Whalen.
{{5-31-92 p.A-1904}}
   2.7.20. The servicing officer for this loan was officer Misenor.
   2.7.21. Under the above stated circumstances, the adverse classification of the loan as $73,000 "Substandard," by the FDIC examiners was reasonable.
   2.7.22. This loan exhibits hazardous lending and lax collection practice of:

   2.7.23. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.8.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, with an unpaid balance of $406,200. (All following requests for admissions in the form of proposed findings of fact numbered 2.8.2. through 2.8.75. refer to this loan as of August 10, 1990.)
   2.8.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $391,000 "Substandard."
   2.8.3. The borrowing entity for this loan is a partnership which owns and operates an office/warehouse complex located in Edina, Minnesota.
   2.8.4. * * * and * * *, are the partners of the borrowing entity and own 95 percent and 5 percent interests, respectively.
   2.8.5. * * * own 100 percent of * * *.
   2.8.6. This loan was not included on the Bank's watch list.
   2.8.7. This loan amount of $406,200 is the balance of a $485,000 line of credit dated July 31, 1990.
   2.8.8. Terms of this loan provide for monthly payments of $11,000 with the remaining balance due on July 25, 1991.
   2.8.9. The Bank's credit file documentation, and statements of Executive Vice President Craig Mathies to FDIC examiners, indicates that the proceeds were used to (a) pay existing loans at the Bank for the borrower and a partnership called Viking Center, (b) payment of debt at a local bank, and (c) for improvements to the borrower's office/warehouse complex.
   2.8.10. This loan is collateralized by (a) a second real estate mortgage on the borrower's office/warehouse complex, (b) an assignment of a vendor's interest in a contract for deed, and (c) an assignment of a promissory note.
   2.8.11. The Bank's second real estate mortgage on the borrower's office/warehouse complex is subject to a prior lien with a balance of approximately $463,000.
   2.8.12. A July 25, 1990 appraisal of the borrower's office/warehouse complex securing this loan was performed by the Bank and values this property at $1,204,000.
   2.8.13. In making this July 25, 1990 Bank appraisal described in request 2.8.12 above, the Bank relied solely on the 1989 real estate tax statement for this property.
   2.8.14. In making this July 25, 1990 appraisal, described in request 1.8.12 above, Bank personnel gave no consideration to the amount of income earned by the subject office/warehouse complex.
   2.8.15. Operating information for the year ending December 31, 1989, for this office/ warehouse complex contained in the Bank's loan file discloses revenues of $92,000, with a $27,000 loss after depreciation of $15,000.
   2.8.16. Due to the inadequacy of the appraisal of borrower's office/warehouse complex securing this loan, collateral protection provided to the Bank by this property is unknown.
   2.8.17. The contract for deed assigned to the Bank to secure payment of this loan is dated April 25, 1986 (the "contract for deed").
   2.8.18. The contract for deed relates to the sale of commercial property by Sancher Savoie Properties, a limited partnership.
   2.8.19. The contract for deed is assigned to the borrower by * * * and * * *, as the general partners of * * *.
   2.8.20. The partnership agreement for * * *, dated May 5, 1983, contained in the Bank's file lists * * * and * * * as the general partners.
   2.8.21. The * * * partnership 1989 tax {{5-31-92 p.A-1905}}return contained in the Bank's file was signed by * * * as general partner.
   2.8.22. The Bank's file contains no information relative to a change in the general partners of the * * * Properties partnership.
   2.8.23. The current balance of the contract for deed is $819,000, payable interest only until its maturity on December 31, 1992.
   2.8.24. A Bank prepared appraisal of the subject property of the contract for deed, valued said property at $2,100,000.
   2.8.25. The basis of this $2,100,000 value by the Bank described in request 2.8.24 above, was the April 25, 1986 contract purchase price of this property and a sales package prepared by the vendee.
   2.8.26. The vendee under the contract for deed is attempting to sell the property.
   2.8.27. Updated financial information on the subject property of this April 25, 1986 contract for deed or this vendee was not in the Bank's loan file.
   2.8.28. Outdated information within the sales package for this April 25, 1986 contract for deed indicates that the cash flow generated by the subject property of said contract for debt service is marginal.
   2.8.29. The Bank's failure to fully document the methodology used in assigning value to the subject property of the contract for deed and the minimal cash flow which said property generates, detracts from the value assigned by the Bank's appraisal of said property.
   2.8.30. The contract for deed details prior liens against the subject property of said contract of approximately $1,238,000, which weakens the level of security this collateral provides to the Bank.
   2.8.31. The borrower has reported to the Bank that one of the loans secured by the property under the contract for deed is now past due and that negotiations are underway with that lender to obtain a discount.
   2.8.32. The Bank's collateral protection for this loan from the assignment of the contract for deed is weak due to (a) the questionable ownership of said contract by the borrower; (b) the inadequate appraisal of the subject property of said contract; and (c) the prior liens on the subject property of said contract.
   2.8.33. The promissory note assigned by the borrower to the Bank to secure this loan runs from * * * to * * * in the principal amount of $400,000 (the "* * * note").
   2.8.34. The terms of the * * * note provide for 9 percent interest, with payments of interest only until August 27, 1992.
   2.8.35. The * * * note secured a previous advance to * * *, a related interest of * * *, which was repaid with proceeds of this loan.
   2.8.36. The * * * note is collateralized by a second real estate mortgage on commercial property in Richfield, Minnesota.
   2.8.37. The property in Richfield, Minnesota, securing the * * * note, which currently houses an automobile dealership and is subject to a first mortgage of approximately $2,000,000.
   2.8.38. The Bank did not have an appraisal of the underlying real estate securing the Walser note, nor financial information on Mr. Walser.
   2.8.39. The Bank's lack of documentation for the * * * note impedes the evaluation of this collateral and undermines the collateral protection provided by said note to the borrower's loan from the Bank.
   2.8.40. A loan package presentation submitted by the borrower to the Bank for this loan indicates that proceeds were to be used to: (a) refinance other debt owed to the Bank; (b) pay debts of the * * *; (c) pay the balance of a second mortgage at another financial institution related to the property sold on the contract for deed; and (d) make improvements on the borrower's office/warehouse complex.
   2.8.41. The borrower's loan package presentation for this loan stated that the funds to pay the contract for deed second mortgage and for the property improvements for the office/warehouse complex would not be needed at that time but drawn upon when needed.
   2.8.42. The borrower drew upon this loan to its maximum amount immediately after the revolving credit agreement for this loan was executed on July 31, 1990.
   2.8.43. There was no reason for the Bank to structure this loan as a line of credit when the proceeds were to be used primarily for repayment of term debt.
   2.8.44. The Bank's records indicate that $287,000 of the proceeds of this loan were used for purposes other than as indicated in the borrower's loan presentation.
{{5-31-92 p.A-1906}}
   2.8.45. The Bank's loan file for this loan did not contain a detailed financial statement for the borrower.
   2.8.46. A balance sheet in the borrower's 1989 tax return in the Bank's file showed total assets of $685,000, total liabilities of $630,000 and a net worth of $55,000.
   2.8.47. This 1989 tax return of the borrower shows that the borrower lost $27,000 in 1989.
   2.8.48. Executive Vice President Mathies indicated to FDIC examiners that the borrower's office/warehouse complex experienced higher vacancies in 1989 which led to the poor operating performance.
   2.8.49. Mathies stated to FDIC examiners that the borrower's net operating income for 1990 should be approximately $147,000, but Mathies did not provide supporting documentation for this estimated income level.
   2.8.50. The Bank obtained a rent roll for borrower's office/warehouse complex securing this loan during the FDIC's 1990 examination which showed said complex to be fully occupied.
   2.8.51. This rent roll for borrower's office/ warehouse complex revealed that approximately 32 percent of subject complex was rented on a month-to-month basis.
   2.8.52. This short term nature of the occupancy on almost one-third of borrower's office/warehouse complex undermines the reliance on any continued ability of borrower's office/warehouse complex to achieve the estimated net operating income.
   2.8.53. The borrower's office/warehouse complex is also in need of maintenance and repairs which will increase the expenses experienced and affect the level of cash flow generated for debt service of this loan.
   2.8.54. Additional funds for debt service of this loan are to come from payments on the contract for deed and the *** note, yet a large portion of these funds are required to service the prior liens on the contract for deed property.
   2.8.55. The Bank's file contains a selfprepared property or financial statement of * * *, dated August 2, 1990, listing total assets of $4,625,000, total liabilities of $261,000, and a net worth of $4,364,000.
   2.8.56. The major assets listed by * * * on this August 2, 1990 statement are Other Real Estate Owned of $1,587,000, Guaranty Collectible of $200,000, Capital Bank Stock listed at $66,500, and ASHA Enterprises, Inc., valued at $1,957,000.
   2.8.57. The Bank's file contains an August 2, 1990 self-prepared property or financial statement of * * *, listing total assets of $1,962,000, total liabilities of $5,000, and a net worth of $1,957,000.
   2.8.58. The majority of assets listed by * * * in this August 2, 1990 statement are real estate partnership interests listed at $830,000, "contracts and fees due" valued at $762,000, and Note Receivables from partners of $200,000.
   2.8.59. The individual financial statements given to the Bank by the partners of borrower contain insufficient detail to substantiate the values shown therein.
   2.8.60. The assets listed by borrower's partners in their respective financial statements given to the Bank for this loan are listed on a net equity basis with the underlying liabilities being unreported.
   2.8.61. As of August 10, 1990, Bank management did not know the level of liabilities for the borrower's partners nor the debt service requirements of each.
   2.8.62. The borrower's partners did not identify any contingent liabilities in their respective financial statements given to the Bank for this loan.
   2.8.63. The borrower's partners did not identify their income levels other than projections, in their respective financial statements given to the Bank for this loan.
   2.8.64. The lack of detail in the financial statements given by borrower's partners to the Bank for the loan, prevents a full assessment of the partners' financial condition.
   2.8.65. This loan is a poorly documented and inadequately reviewed line of credit.
   2.8.66. The hazardous lending practices utilized by Bank management in its underwriting and assessment of this loan has caused the Bank to be subjected to an inordinate degree of risk.
   2.8.67. The financial information acquired by the Bank on the borrower is incomplete and does not appear to support this level of debt.
   2.8.68. The values of the collateral securing this loan are also questionable due to inadequate appraisals and the high level of liens which are superior to the Bank's position.
   2.8.69. The use of proceeds of this loan {{5-31-92 p.A-1907}}for purposes other than those reported by the borrower and the Bank's management, indicates inadequate monitoring of this loan.
   2.8.70. Payments received on this loan during the FDIC examination were excluded from classification.
   2.8.71. The originating officer of this loan was Senior Vice President Misenor.
   2.8.72. The servicing officer of this loan was president Donohoo.
   2.8.73. Under all the above circumstances, the adverse classification of this loan as $391,000 "Substandard" by the FDIC examiners was reasonable.
   2.8.74. This loan exhibits hazardous lending and lax collection practice of:

   2.8.75. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.9.1. As of August 10, 1990, the Bank had five outstanding loans made for investments in condominium units at * * *. (All following requests for admissions in the form of proposed findings of fact numbered 2.9.2. through 2.9.51. refer to these five loans as of August 10, 1990.)
   2.9.2. The first of these loans was to * * * with an unpaid balance of $80,385.
   2.9.3. As of August 10, 1990, the * * * loan was delinquent by 40 days.
   2.9.4. The * * * loan was adversely classified in the FDIC Report of Examination as of August 10, 1990 by the FDIC examiners as $25,000 "Loss."
   2.9.5. The second of these loans was to * * * with an unpaid balance of $80,891, of which $13,803 was carried as a nonledgeder item.
   2.9.6. As of August 10, 1990, the * * * loan was 40 days delinquent.
   2.9.7. The * * * loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by the FDIC examiners as $11,000 "Loss."
   2.9.8. The third loan was to * * *, with an unpaid balance of $83,779, of which $15,881 was carried as a nonledger item.
   2.9.9. As of August 10, 1990, the * * * loan was delinquent by 39 days.
   2.9.10. The * * * loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $6,000 "Loss."
   2.9.11. The fourth loan was * * *, with an unpaid balance of $82,365, of which $37,385 was carried as a nonledger item.
   2.9.12. As of August 10, 1990, the * * * loan was delinquent by 220 days.
   2.9.13. The * * * loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $20,000 "Loss," and $25,000 "Substandard."
   2.9.14. The fifth loan was to * * * with an unpaid balance of $80,735, of which $13,521 was carried as a nonledger item.
   2.9.15. As of August 10, 1990, the * * * loan was delinquent by 39 days.
   2.9.16. The * * * loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $11,000 "Loss."
   2.9.17. The * * * project consists of 16 condominium units on Pokegama Lake in Itasca County, Minnesota.
   2.9.18. The five above-described loans were originated in late 1983, with proceeds used to purchase two and three bedroom condominium units in the * * * project.
   2.9.19. The purchase prices for these condominium units ranged from $104,000 to $110,000.
   2.9.20. These condominium units were originally purchased by each of the above borrowers for investment purposes.
   2.9.21. The original terms for each of these loans included a 20 percent down payment for each condominium unit, a 30-year amortization, with the unpaid balance due in 3 years.
{{5-31-92 p.A-1908}}
   2.9.22. Each borrower's loan was secured by a mortgage on the condominium unit purchased by that borrower.
   2.9.23. A September 26, 1983 independent appraisal valued each of these condominium units at $104,000 to $110,000.
   2.9.24. The market for condominium units in the area of the units securing these loans has deteriorated.
   2.9.25. A March 17, 1988 appraisal by Glenn McLeod, realtor, stated that the decline in condominium values in the Pokegama Lake area could be attributed to a variety of factors, particularly the lack of local buyers.
   2.9.26. Based on comparable sales of similar units in the area, the borrowers' units securing these loans were each appraised by Mr. McLeod at $55,000.
   2.9.27. Senior Vice President Leonard Misenor visited these condominium units in July of 1989, accompanied by Mr. McLeod.
   2.9.28. The condominium property at which these units are located is deteriorating with the interior and exterior of the borrower's units in need of repair.
   2.9.29. The swimming pool at this condominium property is not in working order.
   2.9.30. The lake shore frontage at this condominium property is not easily accessible to the borrower's units, and is not conducive to swimming.
   2.9.31. There are over 60 vacant townhouse and condominium units in the area of borrowers' condominium units due to the failure of another local resort.
   2.9.32. Mr. McLeod estimates the sales price range to liquidate the borrower's units that secure these loans would be between $35,000 and $45,000 per unit.
   2.9.33. Mr. McLeod also indicates that if a $35,000 to $45,000 sales price range did not produce any interest in any of these units in a short period, the sellers should be willing to lower the range to $25,000 to $35,000.
   2.9.34. The * * * note is in nonaccrual status.
   2.9.35. The * * * filed Chapter 7 Bankruptcy on November 17, 1988.
   2.9.36. Mr. * * * has since died.
   2.9.37. The * * * condominium unit securing the * * * loan suffered extensive water damage due to a frozen pipe breaking, although Bank management indicated to FDIC examiners that repairs have been made.
   2.9.38. Title problems pertaining to a mechanics' liens on this * * * condominium unit were discovered by the Bank during foreclosure proceedings.
   2.9.39. The Bank has been unable to clear the title to this * * * condominium unit.
   2.9.40. Bank management charged the * * * loan note down to $25,000 during the FDIC examination as of August 10, 1990.
   2.9.41. This * * * condominium unit is currently listed for sale at $35,900.
   2.9.42. The $25,000 remaining balance of the * * * loan was classified as "Substandard" by the FDIC examiners due to the outstanding liens and questionable salability of said unit.
   2.9.43. As to the other four borrowers described above, the Bank offered individually negotiated settlements to each of these other borrowers.
   2.9.44. These settlements included forgiveness of a portion of the debt in exchange for a payment of the loans.
   2.9.45. These other four borrowers accepted these settlements during the FDIC examination of the Bank as of August 10, 1990.
   2.9.46. The amounts classified "Loss" for each of these other borrowers represents the portion of their loan forgiven by the Bank.
   2.9.47. Each of these other four borrowers has paid the unforgiven portion of their respective loans.
   2.9.48. The origination officer for these five loans was Executive Vice President Mathies.
   2.9.49. The adverse classifications of these loans by the FDIC examiners as listed below, under the above circumstances, were reasonable:

2.9.50. These loans exhibit hazardous lending and lax collection practices of:

   2.9.51. The lending and collection practices described above for these loans are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.10.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $118,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.10.2 through 2.10.10 refer to the Sorenson loan as of August 10, 1990.)
   2.10.2. As of August 10, 1990, this loan was delinquent by 617 days.
   2.10.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examines as $118,000 "Loss."
   2.10.4. This loan was included on the Bank's watch list.
   2.10.5. This loan was previously classified as $688,000 "Substandard" at the last FDIC examination of the Bank and as $450,000 "Substandard" and $238,000 "Doubtful" at the last State examination of the Bank.
   2.10.6. After the State examination of the Bank, the Bank removed from its books as "Loss" $120,000 of the borrower's loan and transferred $450,000 of said loan to *** through the sale of a partnership interest to ***.
   2.10.7. The remaining $118,000 was unsecured and removed from the Bank's books as "Loss" during the FDIC examination as of August 10, 1990.
   2.10.8. Under these circumstances the FDIC examiner's classification of this debt $118,000 "Loss" was reasonable.
   2.10.9. This loan exhibits hazardous lending and lax collection practices of extending credit with insufficient collateral protection for the type of credit extended and the financial condition of the borrower.
   2.10.10. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.11.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, a Real Estate Investment Partnership, with an unpaid balance of $448,712. (All following requests for admissions in the form of proposed findings of fact numbered 2.11.2 through 2.11.43 refer to this loan as of August 10, 1990.)
   2.11.2. This loan is guaranteed by * * *, a partner in * * *.
   2.11.3. This loan was not on the Bank's watch list.
   2.11.4. This loan originated as a result of the Bank's liquidation of collateral acquired as a result of the default of *** on loans made by the Bank.
   2.11.5. On April 13, 1988, the Bank advanced to * * * $75,000 to be used for application fees for financing for three real estate projects.
   2.11.6. At the time of the April 13, 1988 * * * loan, the Bank took a security interest in * * * partnership interest (59 percent) in * * * to secure all of his outstanding loans from the Bank.
   2.11.7. In November 1988, all of the Bank's loans to * * * were placed on nonaccrual and the Bank initiated litigation against * * *.
   2.11.8. In June 1989, the Bank was granted Summary Judgment in its action against * * * for $490,000, and control of * * * interest in * * *.
   2.11.9. * * * owns two office/warehouse buildings, one in Minneapolis, Minnesota and one in Bloomington, Minnesota.
   2.11.10. On April 30, 1990, the Bank sold * * *'s interest in * * * to * * *, who had previously held a minority interest in * * *.
   2.11.11. The purchase price for * * * interest in * * * was $450,000, with sale proceeds to be applied to the * * * debt.
   2.11.12. The Bank financed 100 percent of the purchase of the * * * interest by a loan of $450,000, dated April 30, 1990.
   2.11.13. This $450,000 loan was extended to * * * with * * * providing a personal guarantee.
   2.11.14. The collateral for this loan is a junior real estate mortgage on the two commercial buildings owned by * * *.
{{5-31-92 p.A-1910}}
   2.11.15. A prior lien of $1,350,000 exists on the first one of these two buildings owned by * * *.
   2.11.16. A prior lien of $615,000 exists on the second of these two buildings owned by * * *.
   2.11.17. The balances of these two prior liens totals $1,729,000.
   2.11.18. The Bank does not have in its loan file a final title opinion detailing the Bank's lien position for the collateral for this loan.
   2.11.19. The Bank does have an opinion prepared by President Donohoo on June 11, 1990, referencing preliminary title opinions from April 27, 1990, and stating that an oral check suggested that the * * * properties securing payment of this loan had no other liens, other than those previously identified.
   2.11.20. An appraisal prepared by the Bank assigns a $2,848,800 value to the * * * properties securing payment of this loan.
   2.11.21. In deriving this $2,848,800 value, the Bank capitalized * * *'s 1988 net operating income of $313,000 at an interest rate of 11 percent.
   2.11.22. The Bank's $2,848,000 appraisal of the *** properties securing this loan did not factor possible vacancies into the calculation.
   2.11.23. The Bank's appraisal of the * * * properties securing this loan did not document why * * *'s 1988 income was used rather than its 1989 income of $291,700.
   2.11.24. The inadequate documentation of the value of the * * * properties securing payment of this loan, the deficient documentation of the Bank's lien position in these properties, and the size of the known prior liens on these properties, diminish the ability to assess the collateral protection provided by the Bank's junior real estate mortgage on these properties securing this loan.
   2.11.25. The Bank's file on this loan contains a June 30, 1990 property or financial statement on * * * which lists total assets of $2,173,900, total liabilities of $2,330,600, and a deficit net worth of $156,700.
   2.11.26. Major assets listed on this June 30, 1990 statement of * * * include the net depreciated value of the two * * * properties securing payment of this loan, valued at $1,329,300 and a "special basis" valued at $759,600.
   2.11.27. As of August 10, 1990, the Bank's lending officials did not know what comprised the * * *'s asset "special basis" as indicated on that June 30, 1990 statement.
   2.11.28. Operating information from the * * *'s 1989 tax return in the Bank's file indicates gross income of $476,700, with a net income of $56,500, after depreciation of $75,200.
   2.11.29. The Bank's file on this loan contains a financial statement prepared on a net basis that shows guarantor * * * as having total assets of $2,244,200, total liabilities of $221,800, and a net worth of $2,022,200.
   2.11.30. Adjusting this *** financial statement to reflect total assets and liabilities indicates total assets of $4,832,600, total liabilities of $1,810,200, and a $2,022,400 net worth.
   2.11.31. Major assets indicated by * * * in this financial statement include an office building valued at $2,866,300, a mortgage note receivable valued $932,500, a farm operation valued at $171,600, and a 50 percent interest in a note to a limited partnership, valued at $212,500.
   2.11.32. Liquid assets of * * * listed in this financial statement are limited to $5,000 in cash and $4,300 in marketable securities.
   2.11.33. This * * * financial statement does not disclose whether he has contingent liabilities.
   2.11.34. This * * * financial statement indicates that * * * is involved in at least five business endeavors in which he holds a 50 percent interest or less.
   2.11.35. * * * discloses in this financial statement that three of these endeavors have outstanding debt.
   2.11.36. This * * * financial statement reflects that the debt of those three business endeavors is in proportion to * * * ownership interest in each such endeavor.
   2.11.37. Because of * * *'s liabilities in these indebted endeavors, it is highly probable that contingent liabilities have arisen from * * *'s involvement in those business endeavors and the existence or non-existence of contingent liabilities should be disclosed in his financial statements to the Bank.
   2.11.38. The Bank had no income information for * * *.
   2.11.39. While the * * * properties that secure this loan provided adequate cash flow to service debt in 1989, the borrower's 1990 operation, which now included servicing this {{5-31-92 p.A-1911}}loan, was not being monitored by the Bank lending officials.
   2.11.40. This loan involves an insolvent borrowing entity, a guarantor with only nominal liquidity and a weak collateral position.
   2.11.41. The originating officers of this loan was Mr. Misenor.
   2.11.42. Under all the above circumstances, the FDIC examiner's adverse classification of this loan $449,000 "Substandard" was reasonable.
   2.11.43. This loan exhibits hazardous lending and lax collection practices of:

   2.11.43. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.12.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $125,999. (All following requests for admissions in the form of proposed findings of fact numbered 2.12.2. through 2.12.29. refer to this loan as of August 10, 1990.)
   2.12.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $125,000 "Substandard."
   2.12.3. This loan is on the Bank's watch list.
   2.12.4. The Bank's management indicated to FDIC examiners that the borrower is employed by an electronic security firm of a type which Bank management was unable to identify.
   2.12.5. This loan originated March 15, 1988 at $125,000, with terms of interest only until March 15, 1992, then annual payments of $17,857 for a term of 7 years.
   2.12.6. The proceeds of this loan were used by the borrower to pay the balance of a loan at a now closed financial institution.
   2.12.7. The collateral for this loan consists of 199 shares of ***, said corporation being a one bank holding company controlling the Grand Marais State Bank, Grand Marais, Minnesota.
   2.12.9. The proceeds from the borrower's loan at the now closed financial institution referred to in request 2.12.6 above, were used to purchase 150 shares, *** stock and the borrower had previously owned 49 shares of said stock.
   2.12.10. As additional security for this loan, the borrower has given the Bank an assignment of a stock repurchase agreement for the *** stock.
   2.12.11. The borrower's repurchase agreement contains a "put-back clause" allowing the borrower to sell the *** stock back to the original seller at any time after October 28, 1990.
   2.12.12. President Donohoo stated to FDIC examiners that the borrower presently has no intention of exercising his option under this stock repurchase agreement.
   2.12.13. The *** stock is restricted and can be sold only by selling it back to the original seller.
   2.12.14. The *** stock represents a 10.15 percent interest in ***, which controls 94 percent of the Grand Marais State Bank.
   2.12.15. The Bank did not have any current financial information of ***.
   2.12.16. The Bank's financial information on *** from June 30, 1989, indicated the book value of the *** stock to be approximately $137,000.
   2.12.17. The borrower's most recent financial statement dated January 1, 1990, indicates total assets of $610,000 and a net worth of $302,000.
   2.12.18. The borrower's principal assets listed on this January 1, 1990 statement were his dwelling at $245,000 and the *** stock at $240,000.
   2.12.19. The borrower's annual income is listed in this January 1, 1990 statement of $94,000, but is based on previous employment.
{{5-31-92 p.A-1912}}
   2.12.20. The Bank had not documented the borrower's current salary level in its files.
   2.12.21. The primary repayment source for this loan is the borrower's dividends from ***, supplemented by the borrower's salary income.
   2.12.22. The borrower reported to the Bank that he received approximately $14,000 in dividends from the *** in 1989.
   2.12.23. Subsequent to payment of these 1989 dividends, the Federal Reserve has now restricted the amount of future dividends which *** can pay, but the level of the restriction was unknown by the Bank's management.
   2.12.24. Liberal terms, weak financial position of the borrower and lack of suitable collateral protection are the basis for the classification of this loan.
   2.12.25. The originating officer of this loan was former President Johnson.
   2.12.26. The servicing officer for this loan was Senior Vice President Misenor.
   2.12.27. Under all the above circumstances, the FDIC examiner's adverse classification of this loan $125,000 "Substandard" was reasonable.
   2.12.28. This loan exhibits hazardous lending and lax collection practices of:

   2.12.29. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.13.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, with an unpaid balance of $28,830.
   2.13.2. As of August 10, 1990, the Bank had an outstanding loan to * * *, with an unpaid balance of $266,150, of which $87,548 was carried on a nonledger basis.
(All following requests for admissions in the form of proposed findings of fact numbered 2.13.3 through 2.13.47 refer to the *** loan and the *** loan, collectively, as of August 10, 1990, unless indicated otherwise.
   2.13.3. The * * *, loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $29,000 "Substandard."
   2.13.4. The * * * loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $179,000 "Substandard."
   2.13.5. At the previous State examination of the Bank, the * * * loan was classified "Substandard" at $30,000 and the * * * loan was classified "Substandard" at $184,000.
   2.13.6. These loans are carried on the Bank's watch list.
   2.13.7. * * * is a real estate investor/ developer who was also an owner/officer of *** of Oak Park Heights, Minnesota, which failed April 30, 1988.
   2.13.8. The * * * related loans from the Bank have been adversely classified since March 1985.
   2.13.9. The Bank's nonledger debt on * * * related loans totals $435,000, including a $246,500 loan to * * *, the son of * * *.
   2.13.10. * * * is in a very weak financial position.
   2.13.11. The Bank had no current financial information for * * * to assess the depth of his financial problems since he has been uncooperative and unwilling to supply financial information.
   2.13.12. * * * is liquidating assets to alleviate his cash flow problems.
   2.13.13. In October of 1989, Oak Park ***, an entity owned by * * *, sold the *** in Oak Park Heights, Minnesota.
   2.13.14. The Bank did not have specific information regarding the purchaser or terms of the sale of the ***, but said sale did result in recoveries to the Bank of approximately $36,000 on nonledger balances for loans to the children of ***.
   2.13.15. President Donohoo reported to the FDIC examiners that additional recoveries on this nonledger debt will be forth- {{5-31-92 p.A-1913}}coming starting in 1991 from future payments received from the buyer of the St. Croix Mall.    2.13.16. * * * reduced the nonledger debt of * * * by $50,000 in May of 1990.
   2.13.17. * * * has agreed with the Bank to apply an additional $25,000 to the * * * debt on the condition that the Bank release * * * of his guarantee on the remainder of * * *'s debt.
   2.13.18. Executive Vice President Mathies indicated to the FDIC examiners that the Bank accepted this agreement because the Bank needs * * *'s future cooperation in liquidating both the active and inactive loans remaining.
   2.13.19. The * * *, loan originated at $100,000 in July 1987, as a renewal of working capital advances dating back to 1984.
   2.13.20. The Bank's collateral for the * * *, loan is the assignment of five second mortgages on five twin homes in Woodbury, Minnesota.
   2.13.21. * * *, filed Chapter 11 Bankruptcy in March 1988, and subsequently converted to a Chapter 7 Bankruptcy.
   2.13.22. The Bank's collateral for the * * *, loan was unaffected by said borrower's bankruptcy.
   2.13.23. The mortgagors on the assigned mortgages securing the * * *, loan are individual investors.
   2.13.24. An outdated December 1984 appraisal values the twin homes securing the * * *, loan at $142,000 each.
   2.13.25. Of these five second mortgages assigned to the Bank, (a) one mortgagor has since filed bankruptcy, (b) two mortgagors have paid the balance of their mortgages early for a discount, (c) one mortgagor is nonperforming, and (d) one mortgagor remains performing as agreed.
   2.13.26. The balance of a first mortgage on the property of the remaining performing mortgagor referred to in request 2.13.25(d) above, was reported by Bank management to FDIC examiners to be approximately $88,100, with the junior mortgage assigned to the Bank providing collateral protection of a dollar amount equal to the balance of the * * *, loan.
   2.13.27. The * * * loan in the amount of $114,600 was originated on May 26, 1989, with monthly payments based on a 30-year amortization and the unpaid balance due in 5 years.
   2.13.28. Proceeds from this $114,600 loan were used to (a) pay $50,000 of * * *'s debt to the Bank and (b) pay $65,000 on the unsecured debt of * * * to the Bank.
   2.13.29. The collateral for this $114,600 loan is a first mortgage on commercial property in Oak Park Heights, Minnesota, containing one finished 30 x 40 foot commercial office building and two unfinished buildings of similar size.
   2.13.30. The Bank holds a May 22, 1989 appraisal of this commercial property securing this $114,600 loan prepared by an independent appraiser for * * *, valuing said property at $276,000.
   2.13.31. This commercial property securing this $114,600 loan has a second mortgage of $149,000 outstanding, given to the previous owners.
   2.13.32. The building on this commercial property securing this $114,600 loan was fully occupied by four tenants and, if it remains so, should have sufficient cash flow to service this $114,600 loan.
   2.13.33. One of the four tenants of the building on this commercial property securing this $114,600 loan is a corporate entity owned by * * *.
   2.13.34. A * * * loan of $8,504 is the balance of a $200,000 debt restructure and note dated February 18, 1987, currently payable at $1,055 per month.
   2.13.35. Since inception, this February 1987 note has been reduced by the chargeoff of $87,000, payments of $40,000, and $65,000 from proceeds of the May 26, 1989 loan of $114,600.
   2.13.36. The sum of $55,476 is the balance of a $60,000 loan made on July 2, 1987, with payments based on a 30-year amortization, with the unpaid balance due after 5 years.
   2.13.37. Proceeds from this July 2, 1987 loan were used to refinance other * * * debt at the Bank.
   2.13.38. The Bank's collateral for this July 2, 1987 loan is a first mortgage on a townhouse appraised independently at $88,500 in March, 1985, and reappraised by the Bank at $89,500 in January, 1988.
   2.13.39. The townhouse securing this July {{5-31-92 p.A-1914}}2, 1987 loan was sold on a contract for deed by * * * for approximately $60,000.
   2.13.40. The Bank held an assignment of this contract for deed on this townhouse and continues to hold the first mortgage on said townhouse.
   2.13.41. All of these loans continued to be a protracted workout of a substantially under-secured line of credit which has resulted in considerable loss to the Bank.
   2.13.42. The originating officer of these loans was former Assistant Vice President Connell.
   2.13.43. The servicing officer of these loans was Vice President Mc Williams.
   2.13.44. The following adverse classifications of these loans by FDIC examiners were reasonable under the above circumstances:

2.13.45. These loans exhibit hazardous lending and lax collection practices of:

   2.13.46. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.14.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $365,399. (All following requests for admission in the form of proposed findings of fact numbered 2.14.2 through 2.14.32 refer to this loan as of August 10, 1990.)
   2.14.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990 by FDIC examiners as $365,000 "Substandard."
   2.14.3. This loan was classified at several previous FDIC examinations and $365,000 "Substandard" at the last State examination.
   2.14.4. The borrower is a real estate investor and former president of a now defunct real estate development company.
   2.14.5. The borrower is currently involved with the management of bingo parlors in Oklahoma and Florida, and periodically does consulting work for ***.
   2.14.6. The note for this loan originated at $375,000 on April 28, 1987 and calls for monthly payments of $2,817 based on a 30-year amortization, and has a May 1, 1992 maturity date.
   2.14.7. The loan proceeds from this loan were used to (a) repay a previous $100,000 advance from the Bank to the borrowers, (b) to pay $15,000 in accrued interest, (c) to pay $228,000 on a prior lien on the borrower's home, and (d) to pay $32,000 in mechanic's liens on the borrower's home.
   2.14.8. The borrower's 100,000 advance referred to in request 2.14.7 (a) above, was from January 1985, and was used for personal investments.
   2.14.9. The January 1985, $1,000,000 loan to the borrower was renewed at $100,000 on August 27, 1985, with the Bank receiving a second real estate mortgage on the borrower's home as collateral.
   2.14.10. The August 1985 restructure was described in request 2.14.9 above, undertaken in order to provide the Bank with a first lien on the borrower's home.
   2.14.11. The Bank's file contains independent appraisals dated November 14, 1986, and November 19, 1986, which value the borrower's home securing this loan at $460,000 and $490,000, respectively.
   2.14.12. The comments in these 1986 appraisals indicate the borrower's home securing this loan is an older standard style dwelling which was completely rebuilt with a second floor added.
   2.14.13. The Bank's most recent financial statement for the borrower is from September 1, 1988, which reflects the borrower's total assets at $1,576,900, total liabilities at $2,470,800, and a deficit net worth of $893,900.
   2.14.14. The borrower's net worth has deteriorated from a positive $2,771,000, reflected on his November 15, 1984 property or financial statement provided to the Bank.
{{5-31-92 p.A-1915}}
   2.14.15. Borrower's major assets listed in the borrower's September 1988 financial statement to the Bank include $596,000 in contract receivables from various real estate investments, and his home which he values at $525,000.
   2.14.16. The borrower's September 1988 financial statement to the Bank shows the borrower is highly leverged and reflects the borrower's distressed financial condition.
   2.14.17. The Bank had no income information for the borrower on file.
   2.14.18. Bank management stated to the FDIC examiners that the Bank has attempted to obtain current financial information from the borrower with no success.
   2.14.19. A signed workout agreement dated February 1, 1989, between the Bank and the borrower provided for the Bank's delayed foreclosure to give the borrower an opportunity to bring this loan current.
   2.14.20. The February 1, 1989 workout agreement requires borrower to pay $4,000 per month beginning February 1, 1989, until this loan is current.
   2.14.21. The borrowers have given the Bank a quit-claim deed to the property securing this loan and authorized the Bank to record the deed if one monthly payment is more than 15 days delinquent.
   2.14.22. Once this loan is current, the Bank is to return this quit-claim deed to the borrower and payments will revert back to the schedule as outlined in the mortgage and note.
   2.14.23. Delinquent real estate taxes for the property securing this loan for 1988 and 1989 in the amount of $14,000 remain unpaid.
   2.14.24. The borrower made monthly payments of $4,000 to the Bank as required by the February 1989 workout agreement until February 1990.
   2.14.25. The borrower quit making the additional payments under the February 1988 workout agreement because of a loss of contract income from ***.
   2.14.26. The Bank charged the borrower a $50 monthly late charge on 18 separate occasions since the February 1989 workout agreement was signed, but as of August 10, 1990, the Bank had not enforced said workout agreement.
   2.14.27. This loan is classified "Substandard" due to the borrower's lack of agreed upon performance, the borrower's deteriorated financial condition, and the borrower's uncertain continued ability to service the debt in accordance with the workout agreement for this loan.
   2.14.28. The originating officer for this loan was former Executive Vice President Summers.
   2.14.29. The servicing officer for this loan was Senior Vice President Misenor.
   2.14.30. Under all these circumstances, the adverse classification of this loan $365,000 "Substandard" by FDIC examiners was reasonable.
   2.14.31. This loan exhibits hazardous lending and lax collection practices of:

   2.14.32. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.15.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $182,191. (All following requests for admissions in the form of proposed findings of fact numbered 2.15.2. through 2.15.33. refer to this loan as of August 10, 1990.)
   2.15.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC Examiners as $182,000 "Substandard."
   2.15.3. This loan was classified "Substandard" in the same amount at the previous State examination and $163,000 "Substandard" at the previous FDIC examination.
   2.15.4. This loan is included on the Bank's watch list.
   2.15.5. Borrower is involved in real estate development and sales.
{{5-31-92 p.A-1916}}
   2.15.6. The amount extended in this loan is the balance of a $300,000 note dated July 17, 1984, for which only $192,700 was actually advanced by the Bank.
   2.15.7. This loan was reduced to $163,000, but increased to its present level when the Bank advanced $19,657 in December of 1989 to pay delinquent real estate taxes on the collateral for this loan.
   2.15.8. Terms of repayment for this loan call for payments of $1,900 per month with an original maturity of August 1, 1989.
   2.15.9. The note for this loan has twice been extended with it now set to mature on September 30, 1990.
   2.15.10. The collateral for this loan is a first mortgage on a truck stop on 3.2 acres of land in Burnsville, Minnesota (the "Burnsville property"), appraised at $339,600 in December 1984.
   2.15.11. As additional collateral for the December 1989 advance of $19,657, the Bank took a third real estate mortgage for $75,000 on a truck wash in Roseville, Minnesota (the "Roseville property").
   2.15.12. On December 16, 1989, the Roseville property was appraised at $400,000 by the Bank based on a real estate tax statement for said property.
   2.15.13. The Bank's file comments for this loan indicate that prior liens on the Roseville property total approximately $230,000.
   2.15.14. A title opinion for the Roseville property obtained by the Bank as of February 5, 1990, lists three liens with priority over the Bank's mortgage.
   2.15.15. President Donohoo, who prepared the Roseville property title opinion, told FDIC examiners that he was uncertain of whether all three of these liens remained outstanding as of August 10, 1990.
   2.15.16. The borrower's most recent financial statement on file with the Bank is dated September 25, 1989, and lists total assets of $6,568,000, total liabilities of $2,680,000, and a net worth of $3,888,000.
   2.15.17. The majority of the borrower's assets listed on this September 25, 1989 financial statement are centered in illiquid and encumbered real estate and partnerships.
   2.15.18. The borrower's September 25, 1989 financial statement to the Bank lacks detail and support for the values listed.
   2.15.19. The borrower's income information was not included with this September, 1989 financial statement.
   2.15.20. The borrower's cash flow was deficient as evidenced by his past due real estate tax problems.
   2.15.21. The borrower holds a purchase agreement on the Burnsville property for $350,000 with Strick Trailer, a national truck/ trailer company located in Fairless, Pennsylvania.
   2.15.22. A number of problems must be resolved before the borrower's sale of the Burnsville property can be concluded.
   2.15.23. In December 1988, Strick Trailer found two spots involving gasoline and fuel contamination on the Burnsville property.
   2.15.24. As a result of discovering this contamination on the Burnsville property the borrower hired an engineering firm to do further site assessments and submit a cleanup plan for said property to the Pollution Control Agency.
   2.15.25. The Pollution Control Agency approved the borrower's cleanup plan for the Burnsville property with the costs primarily covered by the State "super fund."
   2.15.26. The borrower's clean up of the Burnsville property will take approximately 2 to 3 years to be completed.
   2.15.27. The borrower and Strick Trailer have entered into a three-year lease on the Burnsville property with the Strick Trailer having option to purchase said property when the cleanup is complete.
   2.15.28. The classification of this loan is continued due to the borrower's illiquid financial position, high debt level, inability to service real estate taxes, and concerns about the value, and thus, protection offered by the collateral.
   2.15.29. The originating officer of this loan was former Assistant Vice President Connell.
   2.15.30. The servicing officer of this loan was Vice President Mc Williams.
   2.15.31. The FDIC examiner's adverse classification of this loan as $182,000 "Substandard" was reasonable under all the above circumstances.
   2.15.32. This loan exhibits hazardous lending and lax collection practice of:

   2.15.33. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.16.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $113,071. (All following requests for admission in the form of proposed findings of fact numbers 2.16.2. through 2.16.34. refer to this loan as of August 10, 1990.)
   2.16.2. As of August 10, 1990, this loan was delinquent by 70 days.
   2.16.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC Examiners as being $113,000 "Substandard."
   2.16.4. The borrower is a retiree and currently resides in Florida.
   2.16.5. This loan represents a workout and a restructuring agreement between the Bank, the borrower, and the borrower's son, * * *.
   2.16.6. This loan was not on the Bank's internal watch list.
   2.16.7. This loan originated as a loan of $160,000, advanced on November 25, 1988.
   2.16.8. The terms of this loan call for annual payments of $20,000 with the unpaid balance due on June 1, 1991.
   2.16.9. This loan is collateralized by a 20 percent general partnership interest in ***, a limited partnership which owns a 120-unit apartment complex for the elderly.
   2.16.10. The Bank's file comments for this loan indicate that the borrower's son tried to sell his general partnership interest in *** to his mother in an effort to pay his outstanding debt at the Bank.
   2.16.11. The Bank's file comments for this loan indicate that the other general partners in *** refused permission for the borrower's son to sell his interest in *** to the borrower.
   2.16.12. The Bank foreclosed on the *** interest of the borrower's son and then sold said interest to the borrower and financed said purchase with this debt.
   2.17.13. The repayment of this loan was structured around the timing of capital distributions from ***, which are paid to its partners on an annual basis.
   2.16.14. A dispute has developed between the general partners of *** resulting in the managing general partner of Raymie withholding capital distributions.
   2.16.15. Bank management indicated to FDIC examiners that litigation between the partners of *** may be necessary to resolve said partners ongoing dispute.
   2.16.16. President Donohoo stated to FDIC examiners that *** is doing well financially, but the managing general partner of *** will not release any financial information on *** so as to allow evaluation of its condition and operations.
   2.16.17. The lack of *** financial information restricts an assessment of the collateral securing this loan.
   2.16.18. As of August 10, 1990, President Donohoo estimated that the borrower's interest in *** is worth approximately $160,000.
   2.16.19. This estimate by President Donohoo of the value of this collateral for this loan was based on a 2-year old purchase price and was not supported by any current information.
   2.16.20. The ongoing disputes between the partners of *** and the probable need of litigation for their resolution will hamper the timely liquidation of this loan.
   2.16.21. The Bank's file on this loan contains a January 12, 1990 self-prepared property or financial statement on the borrower which lists total assets of $1,993,000, total liabilities of $243,000, and a net worth of $1,750,000.
   2.16.22. The major assets listed on this January 12, 1990 statement of borrower include $770,000 in other real estate which includes an unencumbered parcel in Florida values at $225,000, a local condominium unit valued at $225,000 an encumbered for $130,000, and two partnership interests in *** valued at $160,000 each.
   2.16.23. The borrower also lists in this January 12, 1990 financial statement her Florida homestead at $300,000 and a contract receivable from Capital City Corpora- {{5-31-92 p.A-1918}}tion, the Bank's holding company, valued at $790,000.
   2.16.24. This January 12, 1990 financial statement of the borrower lacks sufficient detail to support the asset valuations listed therein.
   2.16.25. The real estate shown in this January 12, 1990 financial statement of the borrower is primarily encumbered or out of territory.
   2.16.26. The value of the contract receivable due from the Bank's holding company listed on this January 12, 1990 financial statement of the borrower is suspect due to the holding company's well documented weak financial condition.
   2.16.27. The borrower also lists in this January 12, 1990 financial statement that she has annual income of $85,000, of which $65,000 is listed as interest paid on the contract receivable due from the Bank's holding company.
   2.16.28. The borrower's income had not been verified by the Bank and the poor financial condition of the Bank's holding company may adversely affect the borrower's continued receipt of income from this source.
   2.16.29. President Donohoo indicated to FDIC examiners that the Bank is currently weighing its options before it determines what collection action will be undertaken for this loan, including that the Bank could sue the borrower for judgment since he believes the borrower has a significant level of assets.
   2.16.30. The ability of the Bank to collect this loan from the borrower through litigation is uncertain based on the unclear and unsupported values of the assets listed on the borrower's January 12, 1990 financial statement to the Bank.
   2.16.31. The dispute between the partners of *** has had an obvious adverse effect on likelihood of repayment of this loan without loss.
   2.16.32. The originating and servicing officer of this loan was Senior Vice President Misenor.
   2.16.32. The FDIC examiner's adverse classification of this loan as $113,000 "Substandard" was reasonable under all the above circumstances.
   2.16.33. This loan exhibits hazardous lending and lax collection practices of:

   2.16.34. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.17.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $102,526. (All following request for admission in the form of proposed findings of fact numbered 2.17.2 through 2.17.27. refers to this loan as of August 10, 1990.)
   2.17.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $103,000 "Substandard."
   2.17.3. The borrower is involved in truck sales, with a major portion of his business related to the sale of over the road tractors.
   2.17.4. This loan was not included on the Bank's watch list.
   2.17.5. The sum $102,526 represents the current balance of a $106,000 note advanced on September 17, 1988.
   2.17.6. This loan originated as part of a restructuring agreement between the Bank and * * *, whereby the note for this loan, originally due to * * * , was sold by * * * to the Bank in satisfaction of * * *'s debt to the Bank.
   2.17.6. Repayment terms of this loan are based on an amortization of approximately 23 years, with the unpaid balance due on December 1, 1991.
   2.17.7. This loan is collateralized by a second real estate mortgage on commercial property in Grand Forks, North Dakota (the "Grand Forks property"), used by the borrower in his truck business.
   2.17.8. The Bank's file contains an outdated September 18, 1984 appraisal of the Grand Forks property valuing it at $395,000.
   2.17.9. Bank management did not know the balance of the first mortgage against the Grand Forks property.
{{5-31-92 p.A-1919}}
   2.17.10. The Bank's file contains the borrower's October 3, 1988 financial statement, which listed the balance of the first mortgage on the Grand Forks property as $260,000.
   2.17.11. The Bank's collateral protection for this loan is marginal based on the old September 1984 appraisal of the collateral and the sizable outstanding prior lien on the collateral.
   2.17.12. The Bank had not obtained current financial information from the borrower.
   2.17.13. The Bank's file contains an outdated October 3, 1988 financial statement for the borrower which lists total assets of $1,855,000, total liabilities of $838,000, and a net worth of $1,017,000.
   2.17.14. The borrower's major assets listed in this October 1988 financial statement are "other real estate" valued at $1,300,000 and encumbered at $605,000, and the borrower's homestead which he values at $335,000 with $230,000 in debt outstanding.
   2.17.15. The borrower has reported to the Bank that his annual income is $79,000, which is insufficient to service the level of the borrower's debt.
   2.17.16. The borrower's real estate taxes are past due for 1987, 1988, and 1989, totaling approximately $48,000, further evidencing the borrower's insufficient cash flow.
   2.17.17. The Bank's management was unaware that the borrower's property taxes were past due.
   2.17.18. The borrower had submitted a check to the Bank in December of 1989 as proof that property taxes had been paid; however, the check submitted was not cancelled not had it cleared the borrower's account.
   2.17.19. Senior Vice President Misenor indicated to FDIC examiners that the borrower has requested the Bank to give him to the end of 1990 to pay the outstanding property taxes.
   2.17.20. The Bank's management has provided inadequate attention to this loan in light of the questionable collateral margin provided by the out of territory real estate and the borrower's failure to pay real estate taxes.
   2.17.21. The Bank's management has not (a) monitored the status or balance of the prior lien on the Grand Forks property securing this loan, nor (b) verify the borrower's payment of real estate taxes even though such taxes represent a significant lien on the Bank's collateral for this loan.
   2.17.22. As of August 10, 1990, the Bank has not obtained current financial information on the borrower even after the borrower's inability to pay taxes suggested the borrower's financial distress.
   2.17.23. Improved monitoring of this credit in conjunction with the development of a repayment plan for past due taxes is considered warranted if this credit is to be liquidated in a timely manner.
   2.17.24. The servicing officer of this loan was Senior Vice President Misenor.
   2.17.25. Under the above circumstances, the FDIC examiner's adverse classification of this loan $103,000 "Substandard" was reasonable.
   2.17.26. This loan exhibits hazardous lending and lax collection practices of:

   2.17.27. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.18.1. As of August 10, 1990 the Bank had an outstanding loan to * * * with an unpaid balance of $65,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.18.2. through 2.18.14. refer to this loan as of August 10, 1990.)
   2.18.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as being $65,000 "Substandard."
{{5-31-92 p.A-1920}}
   2.18.3. This loan is not on the Bank's watch list.
   2.18.4. The proceeds from this loan were used to purchase an office condominium unit, which secures payment of this loan.
   2.18.5. The borrower, who resides in Louisiana, holds this condominium unit as a rental unit.
   2.18.6. The Bank reduced the monthly payments for this loan by $58 in July of 1990 to aid the borrower because of a negative cash flow on this condominium unit.
   2.18.7. The condominium building in which the unit securing this loan is located contains several vacant units.
   2.18.8. The appraised value of the unit securing this loan has not been substantiated by the Bank.
   2.18.9. Based on listed sales prices for other units in the condominium building where the unit securing this loan is located, collateral margin for this loan is slight.
   2.18.10. The Bank's management was unaware of the borrower's financial condition or whether he intended to continue to supplement negative income from the condominium unit securing this loan.
   2.18.11. The facts supporting the adverse classification of this loan were:

2.18.12. FDIC examiners' adverse classification of this loan as $65,000 "Substandard" was reasonable under these circumstances.
2.18.13. This loan exhibits hazardous lending and lax collection practices of:

   2.18.14. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.19.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $70,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.19.2 through 2.19.8 refer to this loan as of August 10, 1990.)
   2.19.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $70,000 "Substandard."
   2.19.3. This loan is classified "Substandard" on the Bank watch list.
   2.19.4. This loan has been previously classified.
   2.19.5. The facts supporting the adverse classification of this loan were:

2.19.6. The FDIC examiners' adverse classification of the loan as $70,000 "Substandard" was reasonable under these circumstances.
2.19.7. This loan exhibits hazardous lending and lax collection practices of:

   2.19.8. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.20.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $60,000. (All following request for admissions in the form of proposed findings of fact numbered 2.20.2. through 2.20.12. refer to the loan as of August 10, 1990.)
   2.20.2. This loan was adversely classified in the FDIC Report of Examination as {{5-31-92 p.A-1921}}of August 10, 1990, by FDIC examiners as $60,000 "Substandard."
   2.20.3. This loan is classified "Substandard" on Bank's watch list.
   2.20.4. This loan was previously classified $60,000 at the August 1989 FDIC Examination and $62,000 at the March 1990 State examination.
   2.20.5. The proceeds from this loan were used for low-income housing.
   2.20.5. This duplex and this four-plex secure payment of this loan.
   2.20.6. The four-plex securing this loan is not leased and the renovation of the duplex securing this loan has just begun.
   2.20.7. The Bank does not have a well supported recent appraisal for the properties securing this loan.
   2.20.8. The Bank does not have or could not produce to FDIC examiners, any current operating information on the borrower.
   2.20.9. The facts supporting the adverse classification of this loan were:

2.20.10. The FDIC examiners adverse classification of this loan as $60,000 "Substandard" was reasonable under these circumstances.
2.20.11. This loan exhibits hazardous lending and lax collection practices of:

   2.20.12. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.21.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $69,000. (All following requests for admission in the form of proposed findings of fact numbered 2.21.2. through 2.21.12. refer to this loan as of August 10, 1990.)
   2.21.2. As of August 10, 1990, this loan was delinquent by 176 days.
   2.21.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $69,000 "Substandard."
   2.21.4. This loan is on the Bank's watch list.
   2.21.5. The collateral for this loan is a vacant office condominium unit in a building known as the "Great Northwestern Building".
   2.21.6. The borrower provided the Bank with an unrecorded quit-claim deed on the unit securing this loan as part of an agreement dated June 20, 1990, allowing the borrower 90 days to sell said unit.
   2.21.7. The borrower's asking price for the condominium unit securing this loan is $82,000.
   2.21.8. Delinquent 1989 and 1990 taxes on the condominium unit securing payment of this loan total $9,620.
   2.21.9. The facts supporting the adverse classification of this loan were:

2.21.10. The FDIC examiners' adverse classification of this loan as $69,000 "Substandard" was reasonable under these circumstances.
2.21.11. This loan exhibits hazardous lending and lax collection practices of:

   2.21.12. The lending and collection practices described above for this loan are con- {{5-31-92 p.A-1922}}trary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.22.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, with an unpaid balance of $30,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.22.2 through 2.22.10 refer to this loan as of August 10, 1990.)
   2.22.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as being $30,000 "Substandard."
   2.22.3. This loan was on the Bank's watch list.
   2.22.4. The borrower is a weak earning business with modest level of capital.
   2.22.5. The Bank has no formal evaluation of the value of the collateral securing payment of this loan.
   2.22.6. There is common ownership of borrower with * * *, which is also financially distressed.
   2.22.7. The facts supporting the adverse classification of the loan were:

2.22.8. The FDIC examiners adverse classification of this loan as $30,000 "Substandard" was reasonable under these circumstances.
2.22.9. This loan exhibits hazardous lending and lax collection practices of:

   2.22.10. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.23.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $55,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.23.2. through 2.23.10. refer to this loan as of August 10, 1990.)
   2.23.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $55,000 "Substandard."
   2.23.3. The Bank has internally classified this loan as "Substandard."
   2.23.4. This loan was classified "Substandard" at both the last State and FDIC examinations.
   2.23.5. The Bank's file contains a financial statement of the borrower dated April 9, 1990, which indicates the borrower has a $17,200 deficit net worth with additional contingent liabilities of $691,000.
   2.23.6. The Bank's collateral for this loan is the borrower's insurance commissions receivable.
   2.23.7. The facts supporting the adverse classification of this loan were:

   2.23.8. The FDIC examiners' adverse classification of this loan as $55,000 "Substandard" was reasonable under these circumstances.
   2.23.9. This loan exhibits hazardous lending and lax collection practices of extending credit with insufficient collateral protection for the type of credit extended and the financial condition of the borrower.
   2.23.10. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.24.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $32,000. (All following requests for admission in the form of proposed findings of fact numbered 2.24.2. {{5-31-92 p.A-1923}}through 3.24.10. refer to this loan as of August 10, 1990.)
   2.24.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by the FDIC examiners as being $32,000 "Substandard."
   2.24.3. This loan is on the Bank's watch list.
   2.24.4. The borrower was a partnership that is now defunct.
   2.24.5. The Bank is relying on the individual former partners of borrower to repay this loan.
   2.24.6. The Bank's collateral for this loan is a junior real estate mortgage with limited collateral margin.
   2.24.7. The facts supporting the adverse classification of this loan were:

   2.24.8. The FDIC examiners' adverse classification of this loan as $32,000 "Substandard" was reasonable under these circumstances.
   2.24.9. This loan exhibits hazardous lending and lax collection practices for extending credit with insufficient collateral protection for the type of credit extended and the financial condition of the borrower.
   2.24.10. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage of a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.25.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $65,000. (All following requests for admission in the form of proposed findings of fact numbered 2.25.2. through 2.25.9. refer to this loan as of August 10, 1990.)
   2.25.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $65,000 "Substandard."
   2.25.3. This loan is classified "Substandard" on the Bank's watch list.
   2.25.4. This loan has been previously classified.
   2.25.5. This loan results from the sale of "other real estate" on a contract for deed to the borrower with only a small down payment.
   2.25.6. The facts supporting the adverse classification of this loan were:

2.25.7. The FDIC examiners' adverse classification of this loan as $65,000 "Substandard" was reasonable under these circumstances.
2.25.8. This loan exhibits hazardous lending and lax collection practices of:

   2.25.9. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.26.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $24,000. (All following requests for admission in the form of proposed findings of fact numbered 2.26.2. through 2.26.10. refer to this loan as of August 10, 1990.)
   2.26.2. As of August 10, 1990, this loan was delinquent by 134 days.
   2.26.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $24,000 "Loss."
   2.26.4. This loan is on the Bank's watch list.
   2.26.5. This loan is an unsecured loan that is severely delinquent.
   2.26.6. The Bank is pursuing legal ac- {{5-31-92 p.A-1924}}tions against the borrower to effect collection of this loan.
   2.26.7. The facts supporting the adverse classification of this loan were:

2.26.8. The FDIC examiners' adverse classification of this loan $24,000 "Loss" was reasonable under these circumstances.
2.26.9. This loan exhibits hazardous lending and lax collection practices of:

   2.26.10. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.27.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $51,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.27.2. through 2.27.13. refer to this loan as of August 10, 1990.)
   2.27.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $51,000 "Substandard."
   2.27.3. This loan was not on the Bank's watch list.
   2.27.4. This loan was advanced on May 3, 1989, to construct a new dwelling and refinance an existing loan.
   2.27.5. The borrower has made no principal reductions of this loan since its inception.
   2.27.6. The Bank's collateral for this loan is a junior real estate mortgage on the borrower's previous dwelling.
   2.27.7. The borrower was to repay this loan when his previous dwelling was sold.
   2.27.8. The borrower's former dwelling securing this loan has been for sale for 20 months and no offers to purchase were pending.
   2.27.9. The borrower's former dwelling securing payment of this loan is listed for sale at $99,000.
   2.27.10. The facts supporting the adverse classification of this loan were:

2.27.11. The FDIC examiners' adverse classification of this loan as $51,000 "Substandard" was reasonable under these circumstances.
2.27.12. This loan exhibits hazardous lending and lax collection practices of:

   2.27.13. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.28.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, with an unpaid balance of $40,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.28.2. through 2.28.10. refer to this loan, as of August 10, 1990.)
   2.28.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $40,000 "Substandard."
   2.28.3. This loan is classified "Substandard" on the Bank's watch list.
   2.28.4. This loan was a nonaccrual loan classified "Doubtful" in the amount of {{5-31-92 p.A-1925}}$125,000 at the last FDIC Examination and $48,000 "Substandard" at the last State examination.
   2.28.5. This loan presents a long term workout situation that is in the process of being restructured.
   2.28.6. The Bank had no current financial information for the borrower.
   2.28.7. The facts supporting the adverse classification of this loan were:

2.28.8. The FDIC examiner's adverse classification of this loan as $40,000 "Substandard" was reasonable under these circumstances.
2.28.9. This loan exhibits hazardous lending and lax collection practices of:

   2.28.10. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk, or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.29.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $16,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.29.2. through 2.29.12. refer to this loan as of August 10, 1990.)
   2.29.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $16,000 "Substandard."
   2.29.3. This loan was previously classified at the August 1989 FDIC Examination.
   2.29.4. The borrower and the Bank have a dispute arising from the Bank's release of stock held as collateral for this loan to the borrower's former business partner.
   2.29.5. The borrower's financial condition deteriorated significantly as a result of severing his interests with his former partner.
   2.29.6. The borrower is now self employed as a contractor.
   2.29.7. The Bank had no current income information on the borrower.
   2.29.8. This loan is currently secured by a 1987 Ford pickup truck with an estimated value of approximately $9,000.
   2.29.9. The facts supporting the adverse classification of this loan were:

   2.29.10. The FDIC examiners' adverse classification of this loan as $16,000 "Substandard" was reasonable under these circumstances.
   2.29.11. This loan exhibits hazardous lending and lax collection practices of extending credit with insufficient collateral protection for the type of credit extended and the financial condition of the borrower.
   2.29.12. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.30.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $32,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.30.2 through 2.30.15. refer to this loan as of August 10, 1990.)
   2.30.2. As of August 10, 1990, this loan was delinquent by 63 days.
   2.30.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $32,000 "Substandard."
   2.30.4. The collateral for this loan is a first real estate mortgage on a duplex in St. Paul, Minnesota.
   2.30.5. The duplex securing this loan is sold on contract for deed to a vendee who {{5-31-92 p.A-1926}}currently occupies one of the units in said duplex.
   2.30.6. The annual income of the vendee under this contract for deed is estimated to be $8,000 to $9,000, working as a dishwasher at a local restaurant.
   2.30.7. The appraised value of the duplex securing this loan as accepted by the Bank, is $24,000, and was derived from a 1989 property tax statement for said duplex.
   2.30.8. The borrowers ware very anxious to cease their involvement with the property securing payment of this loan.
   2.30.9. The vendee under the contract for deed for the property securing this loan is attempting to refinance his acquisition of said property with the Veterans Administration.
   2.30.10. The Bank's management was not aware of the refinance status of this loan.
   2.30.11. The Bank extended its mortgage on the property securing this loan until October 1990 in hopes that refinancing will occur.
   2.30.12. The facts supporting the adverse classification of this loan were:

2.30.13. The FDIC examiners' adverse classification of this loan as $32,000 "Substandard" was reasonable under these circumstances.
2.30.14. This loan exhibits hazardous lending and lax collection practices of:

   2.30.15. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.31.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $40,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.31.2. through 2.31.9. refer to this loan as of August 10, 1990.)
{{5-31-92 p.A-1927}}
   2.31.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $40,000 "Substandard."
   2.31.3. This loan was classified "Substandard" on the Bank's watch list.
   2.31.4. This loan was "Substandard" at both the last State and FDIC examinations.
   2.31.5. This loan is in a continued workout situation between the Bank and the borrower.
   2.31.6. The facts supporting the adverse classification of this loan were:

2.31.7. The FDIC examiners' adverse classification of this loan as $40,000 "Substandard" was reasonable under these circumstances.
2.31.8. This loan exhibits hazardous lending and lax collection practices of:

   2.31.9. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.32.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $22,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.32.2. through 2.32.7. refer to this loan as of August 10, 1990.)
   2.32.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiner as $22,000 "Substandard."
   2.32.3. This loan was not on the Bank's watch list.
   2.32.4. The facts supporting the adverse classification of this loan were:

2.32.5. The FDIC examiners' adverse classification of this loan as $22,000 "Substandard" was reasonable under these circumstances.
2.32.6. This loan exhibits hazardous lending and lax collection practices of:

   2.32.7. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.33.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid amount of $17,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.33.2. through 2.33.7. refer to this loan as of August 10, 1990.)
   2.33.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiner as $17,000 "Substandard."
   2.33.3. This loan was not on the Bank's watch list.
   2.33.4. The facts supporting the adverse classification of this loan were:

2.33.5. The FDIC examiners' adverse classifications of this loan as $17,000 "Substandard" was reasonable under these circumstances.
2.33.6. This loan exhibits hazardous lending and lax collection practices of:

   2.33.7. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.34.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $68,000. (All following requests for admission in the form of proposed findings of fact number 2.34.2. through 2.34.12. refer to this loan as of August 10, 1990.)
   2.34.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $68,000 "Substandard."
   2.34.3. This loan is not on the Bank's watch list.
   2.34.4. The borrower is unemployed.
   2.34.5. The Bank is currently liquidating the collateral securing payment of this loan so as to effect repayment.
   2.34.6. The Bank's collateral for this loan consists of 167,000 shares of Work Container Corporation stock.
   2.34.7. The Bank's collateral for this loan is a penny stock and the Bank has been able to only slowly liquidate it so as to avoid depressing its value.
   2.34.8. It may take the Bank a considerable amount of time to sell the remaining {{5-31-92 p.A-1928}}shares in this slow liquidation of the Bank's collateral.
   2.34.9. The facts supporting the adverse classifications of this loan were:

2.34.10. The FDIC examiner's adverse classification of this loan as $68,000 "Substandard" was reasonable under these circumstances.
2.34.11. This loan exhibits hazardous lending and lax collection practices of:

   2.34.12. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.35.1. As of August 10, 1990, the Bank had an outstanding loan t the * * * Trust with an unpaid balance of $44,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.35.2. through 2.35.10. refer to this loan as of August 10, 1990.)
   2.35.2. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $44,000 "Substandard."
   2.35.3. This loan is not on Bank's watch list.
   2.35.4. This loan is unsecured.
   2.35.5. The borrower is insolvent and generates insufficient cash flow for the debt service of this loan.
   2.35.6. President Donohoo and Executive Vice President Mathies were both unaware that this loan was unsecured.
   2.35.7. The facts supporting the adverse classification of this loan were:

   2.35.8. FDIC examiner's adverse classification of this loan as $44,000 "Substandard" was reasonable under these circumstances.
   2.35.9. This loan exhibits hazardous lending and lax collection practices of extending credit with insufficient collateral protection for the type of credit extended and the financial condition of the borrower.
   2.35.10. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.36.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $3,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.36.2. through 2.36.7. refer to this loan as of August 10, 1990.)
   2.36.2. As of August 10, 1990, this loan was delinquent by 70 days.
   2.36.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $3,000 "Substandard."
   2.36.4. The facts supporting the adverse classification of this loan were:

2.36.5. The FDIC examiners' adverse classification of this loan as $3,000 "Substandard" was reasonable under these circumstances.
2.36.6. This loan exhibits hazardous lending and lax collection practices of:

{{5-31-92 p.A-1929}}
   2.36.7. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.37.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, with an unpaid balance of $73,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.37.2. through 2.37.11. refer to this loan as of August 10, 1990.)
   2.37.2. As of August 10, 1990, this loan was late in payment by 14 days.
   2.37.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $73,000 "Substandard."
   2.37.4. This loan was not on the Bank's watch list.
   2.37.5. The borrower has suffered weak operating income and has made asset sales to supplement its cash flow.
   2.37.6. The borrower has converted a portion of the Bank's collateral securing payment of this loan without any subsequent reduction of the balance of this loan.
   2.37.7. The value of the Bank's remaining collateral securing payment of this loan is unknown.
   2.37.8. The facts supporting the adverse classification of this loan were:

2.37.9. The FDIC examiners' adverse classification of this loan as $73,000 "Substandard" was reasonable under these circumstances.
2.37.10. This loan exhibits hazardous lending and lax collection practices of:

   2.37.11. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.38.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, with an unpaid balance of $36,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.38.2. through 2.38.10. refer to this loan as of August 10, 1990.)
   2.38.2. As of August 10, 1990, this loan was late in payment by 10 days.
   2.38.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $36,000 "Substandard."
   2.38.4. This loan was on the Bank's watch list.
   2.38.5. The borrower is insolvent and experiencing operating losses.
   2.38.6. The Bank's collateral securing payment of this loan is of a highly specialized nature and its value is suspect.
   2.38.7. The facts supporting the adverse classification of this loan were:

2.38.8. The FDIC examiners' adverse classification of this loan as $36,000 "Substandard" was reasonable under these circumstances.
2.38.9. This loan exhibits hazardous lending and lax collection practices of:

   2.38.10. The lending and collection prac- {{5-31-92 p.A-1930}}tices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   2.39.1. As of August 10, 1990, the Bank had an outstanding loan to * * * with an unpaid balance of $45,000. (All following requests for admissions in the form of proposed findings of fact numbered 2.39.2. through 2.39.17. refer to this loan as of August 10, 1990.)
   2.39.2. As of August 10, 1990, this loan was delinquent by 91 days.
   2.39.3. This loan was adversely classified in the FDIC Report of Examination as of August 10, 1990, by FDIC examiners as $45,000 "Substandard."
   2.39.4. This loan was on the Bank's watch list and nonaccrual list.
   2.39.5. The Bank's collateral for this loan in a first mortgage on a duplex in St. Paul, Minnesota.
   2.39.6. The borrower has abandoned the property securing payment of this loan.
   2.39.7. The Bank has an unrecorded deed transferring title of collateral for this loan to the Bank.
   2.39.8. The property securing this loan is in need of repairs.
   2.39.9. The property securing this loan is encumbered by delinquent real estate taxes of $5,800.
   2.39.10. As of August 10, 1990, proceeds from a $6,000 promissory note from the borrower, payable to the Bank on September 11, 1990, were to be used to pay the delinquent real estate taxes for the property securing this loan.
   2.39.10. The Bank's management stated to FDIC examiners that when the taxes on the property securing this loan are brought current, the said property will be taken back by the Bank are "ORE."
   2.39.12. A listing agreement for selling the property securing this loan at $59,900 exists, but a letter from the listing realtor estimates the value of said property at $50,000 to $55,000.
   2.39.13. The Bank has received a cash offer of $35,000 for the property securing this loan.
   2.39.14. The facts supporting the adverse classification were:

2.39.15. The FDIC examiner's adverse classification of this loan as $45,000 "Substandard" was reasonable under these circumstances.
2.39.16. This loan exhibits hazardous lending and lax collection practices of:

2.39.17. The lending and collection practices described above for this loan are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or change to a banking institution, its shareholders, or the agencies administering the insurance funds.

Technical Exceptions

   3.1. Citation of a loan as a "Technical Exception" indicates the FDIC Examiner's determination that there is a technical deficiency in the documentation of the loan.
   3.2. The FDIC Report of Examination of the Bank as of August 10, 1990, indicated that the 66 loans were cited for having technical exceptions in documentation.
   3.3.1. As of August 10, 1990, the Bank had an outstanding loan to * * * , the amount of the unpaid balance being $166,000.
   3.3.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.3.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.3.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.4.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $65,000.
   3.4.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.4.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.4.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.5.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $70,000.
   3.5.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.5.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.5.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.6.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $188,000.
   3.6.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.6.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.6.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.7.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $25,000.
   3.7.2. This loan to * * *, was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.7.3. As of August 10, 1990, the documentation of this * * *, loan was deficient based on the following facts:

{{5-31-92 p.A-1932}}
   3.7.4. The above-stated documentation deficiencies in this * * *, loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.8.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $324,000.
   3.8.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.8.3. As of August 10, 1990, the documentation of this * * * loan was deficient because the appraisal of the collateral securing this loan employed an inadequate appraisal methodology.
   3.8.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.9.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $139,000.
   3.9.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.9.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.9.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.10.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $66,000.
   3.10.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.10.3. The documentation of the * * * loan was deficient based on the following facts:

   3.10.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.11.1. As of August 10, 1990, the Bank has an outstanding loan to * * *, the amount of the unpaid balance being $60,000.
   3.11.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.11.3. As of August 10, 1990, the documentation of this * * * loan was deficient due to inadequate appraisal methodologies employed in two appraisals of collateral securing this loan.
   3.11.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.12.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $69,000.
   3.12.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.12.3. As of August 10, 1990, the docmentation of this * * * loan was deficient due to deficient documentation of whether the collateral was insured.
   3.12.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible con- {{5-31-92 p.A-1933}}sequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.13.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $91,000.
   3.13.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.13.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.13.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.14.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $64,000.
   3.14.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.14.3. As of August 10, 1990, the documentation of the * * * loan was deficient based on the following facts:

   3.14.4. The above-stated documentation deficiencies in the * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.15.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $103,000.
   3.15.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.15.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts relating to the collateral for this loan:

   3.15.4. The above-stated documentation deficiencies in the * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.16.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $74,000.
   3.16.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.16.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.16.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a bank- {{5-31-92 p.A-1934}}ing institution, its shareholders, or the agencies administering the insurance funds.
   3.17.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $68,000.
   3.17.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.17.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.17.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.18.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $297,000.
   3.18.2. This loan to * * *, was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.18.3. As of August 10, 1990, the documentation of this * * *, loan was deficient in that there was no current financial information, only an outdated financial statement for the borrower, dated March 31, 1989.
   3.18.4. The above-stated documentation deficiency in this * * *, loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.19.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $205,000.
   3.19.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.19.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.19.4. The above-stated documentation deficiencies in this * * * are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.20.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $362,000.
   3.20.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.20.3. As of August 10, 1990, the documentation of this * * * loan was deficient due to the borrower's non-disclosure of contingent liabilities.
   3.20.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.21.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $76,000.
   3.21.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.21.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.21.4. The above-stated documentation deficiencies in this * * * loan are contrary to {{5-31-92 p.A-1935}}generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencase administering the insurance funds.
   3.22.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $667,000.
   3.22.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.22.3. As of August 10, 1990, the documentation of this * * * loan was deficient due to the absence of any current income information on the borrower.
   3.22.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.23.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $45,000.
   3.23.2. This loan to * * *, was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.23.3. As of August 10, 1990, the documentation of this * * *, loan was deficient based on the following facts:

   3.24.4. The above-stated documentation deficiencies in this * * *, loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.24.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $204,000.
   3.24.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.24.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.24.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.25.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $226,000.
   3.25.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.25.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.25.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.26.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $95,000.
   3.26.2. This loan to * * * was cited as an asset listed for technical exception in the {{5-31-92 p.A-1936}}FDIC's Report of Examination as of August 10, 1990.
   3.26.3. As of August 10, 1990, the documentation of this * * * loan was deficient due to the borrower's non-disclosure of contingent liabilities.
   3.26.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.27.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $40,000.
   3.27.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.27.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.27.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.28.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $228,000.
   3.28.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.28.3. The documentation of this * * * loan was deficient in that the appraisal of the collateral for this loan employed an inadequate appraisal methodology.
   3.28.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.29.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $56,000.
   3.29.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.29.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.29.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.30.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $94,000.
   3.30.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.30.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.30.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.31.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $200,000.
   3.31.2. This loan to * * * was cited as an asset listed for technical exception in the {{5-31-92 p.A-1937}}FDIC's Report of Examination as of August 10, 1990.
   3.31.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.31.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.32.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $80,000.
   3.32.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.32.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.32.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.33.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $124,000.
   3.33.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.33.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.33.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.34.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $65,000.
   3.34.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.34.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.34.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.35.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $110,000.
   3.35.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.35.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.35.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.36.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $32,000.
   3.36.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.36.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.36.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.37.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $51,000.
   3.37.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.37.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.37.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.38.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $40,000.
   3.38.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.38.3. As of August 10, 1990, the documentation of this * * * loan was deficient because there was no current financial statement in that there was only an outdated financial statement for the borrower, dated December 31, 1987.
   3.38.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.39.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $150,000.
   3.39.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.39.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.39.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.40.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $76,000.
   3.40.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.40.3. As of August 10, 1990, the doc- {{5-31-92 p.A-1939}}umentation of the * * * loan was deficient because the appraisal of the collateral securing this loan employs an inadequate appraisal methodology by relying on a property tax statement.
   3.40.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.41.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $113,000.
   3.41.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.41.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.41.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.42.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $16,000.
   3.42.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.42.3. The documentation of this * * * loan was deficient because there was no current financial statement in that there was only an outdated financial statement for the borrower, dated August 3, 1988.
   3.42.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.43.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $83,000.
   3.43.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.43.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.43.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.44.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $335,000.
   3.44.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.44.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.44.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a bank- {{5-31-92 p.A-1940}}ing institution, its shareholders, or the agencies administering the insurance funds.
   3.45.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $67,000.
   3.45.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.45.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.45.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.46.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $53,000.
   3.46.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.46.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.46.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.47.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $74,000.
   3.47.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.47.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.47.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.48.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $32,000.
   3.48.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.48.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.48.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.49.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $81,000.
   3.49.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.49.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:
{{5-31-92 p.A-1941}}

   3.49.4. The above-stated documentation deficiencies in this * * * Inc. loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.50.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $449,000.
   3.50.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.50.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.50.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.51.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $32,000.
   3.52.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.51.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.51.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.52.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $193,000.
   3.52.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.53.3. As of August 10, 1990, the documentation of this * * * loan was deficient due to the lack of rental information for collateral securing this loan.
   3.52.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.53.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $67,000.
   3.53.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.53.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.53.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.54.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $225,000.
   3.54.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.54.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.54.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.55.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $499,000.
   3.55.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.55.3. As of August 10, 1990, the documentation of this * * * loan was deficient because there was no operating statement for the borrowers.
   3.55.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.56.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $406,000.
   3.56.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.56.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.56.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.57.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $90,000.
   3.57.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.57.3. As of August 10, 1990, the documentation of this * * * loan was deficient because there was no disclosure of whether guarantor William Liebel had contingent liabilities.
   3.57.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.58.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $135,000.
   3.58.2. This loan to * * * was cited as an {{5-31-92 p.A-1943}}asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.58.3. As of August 10, 1990, the documentation of the * * * loan was deficient because there was no rental information for the collateral securing this loan.
   3.58.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.59.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $45,000.
   3.59.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.59.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.59.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.60.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $174,000.
   3.60.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.60.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.60.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.61.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $49,000.
   3.61.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.61.3. The documentation of this * * * loan was deficient because there was no operating statement for the borrower.
   3.61.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.62.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $67,000.
   3.62.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.62.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.62.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
{{5-31-92 p.A-1944}}
   3.63.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $376,000.
   3.63.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.63.3. As of August 10, 1990, the documentation of this * * * loan was deficient because there was no current financial statement in that there was only an outdated financial statement of borrower, dated June 16, 1989.
   3.63.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.64.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $182,000.
   3.64.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.64.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

   3.64.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.65.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $365,000.
   3.65.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.65.3. As of August 10, 1990, the documentation of this * * * loan was deficient because there was no current financial statement in that there was only the outdated financial statement of borrower, dated September 1, 1988.
   3.65.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.66.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $219,000.
   3.66.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.66.3. As of August 10, 1990, the documentation of this * * * loan was deficient because the borrower's property or financial statement contains mathematical errors.
   3.66.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.67.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $113,000.
   3.67.2. This loan to * * * was cited as an asset listed for technical exception in the FDIC's Report of Examination as of August 10, 1990.
   3.67.3. As of August 10, 1990, the documentation of this * * * loan was deficient because the property or financial statement of the borrower lacks sufficient detail to accurately assess the borrower's financial condition.
   3.67.4. The above-stated documentation deficiency in this * * * loan is contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.
   3.68.1. As of August 10, 1990, the Bank had an outstanding loan to * * *, the amount of the unpaid balance being $103,000.
   3.68.2. This loan to * * * was cited as an asset listed for technical exception in the {{5-31-92 p.A-1945}}FDIC's Report of Examination as of August 10, 1990.
   3.68.3. As of August 10, 1990, the documentation of this * * * loan was deficient based on the following facts:

3.68.4. The above-stated documentation deficiencies in this * * * loan are contrary to generally accepted documentation standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a banking institution, its shareholders, or the agencies administering the insurance funds.

Excessive Volume of Poor Quality Loans

   4.1. As of August 10, 1990, the Bank's total capital, as defined by 12 C.F.R. § 325.2(a), equaled $3,414,000.
   4.2. As of August 10, 1990, the Bank's primary capital, as defined by 12 C.F.R. § 325.2(h), equaled $3,414,000.
   4.3. As of August 10, 1990, the Bank's total equity capital and allowance for loan and lease losses equaled $4,158,000.
   4.4. As of August 10, 1990, the Bank's total assets, as defined by 12 C.F.R. § 325.2(k), equaled $43,509,000.
   4.5. As of August 10, 1990, the Bank's total deposits equaled $38,620,000.
   4.6. As of August 10, 1990, the Bank's total loans equaled $22,284,000.
   4.7. As of August 10, 1990, the Bank's loan adversely classified "Substandard," equaled $3,722,000.
   4.8. As of August 10, 1990, the Bank's loans adversely classified "Doubtful," equaled $139,000.
   4.9. As of August 10, 1990, the Bank's loans adversely classified "Loss," equaled $737,000.
   4.10. As of August 10, 1990, the Bank's total adversely classified loans equaled $4,598,000.
   4.11. As of August 10, 1990, the Bank's total adversely classified loans equaled approximately 20.6 percent of the Bank's total loans.
   4.12. This 20.6 percent ratio of adversely classified loans to total loans is considered excessive because it indicates that the Bank is experiencing a high risk of loss in its loan portfolio.
   4.13. As of August 10, 1990, the Bank's adversely classified loans equaled 110.8 percent of the Bank's total equity capital and allowance for loan and lease losses.
   4.14. This 110.8 percent ratio of the Bank's adversely classified assets to the Bank's total equity capital and allowance for loan and lease losses is considered excessive because if the Bank were to fail under these circumstances and if all these adversely classified loans became "Loss" the Bank's depositors and the FDIC deposit insurance fund would be exposed to loss.
   4.15. The Bank's operation with an excessive volume of poor quality loans in relation to its total loans and in relation to its total equity capital and allowance for loan and lease losses, is contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a bank, its shareholders, or the agencies administering the insurance funds.

Inadequate Allowance for Loan and Lease
Losses

   5.1. As of August 10, 1990, the Bank's allowance for loan and lease losses ("allowance") was $930,000.
   5.2. As of August 10, 1990, the loans adversely classified "Loss," equaling $737,000 were subject to immediate chargeoff against the allowance.
   5.3. As of August 10, 1990, 50 percent of the loans classified "Doubtful," totaling $69,500, were subject to immediate chargeoff against the allowance.
   5.4. The charge-off of $737,000 in loans classified "Loss," and $69,500 in loans classified "Doubtful," effectively reduced the Bank's allowance to $125,000.
   5.5. As of August 10, 1990, the other criticized, or adversely classified loans, consisting of approximately $3,722,000 "Substandard," and the remaining $69,500 "Doubtful," exceeded the Bank's allowance by approximately $3,668,000.
   5.6. Generally accepted standards of pru-
{{5-31-92 p.A-1946}}dent bank operations for a bank with the level of adversely classified loans in relation to its total loans and in relation to its equity capital and allowance similar to that of the Bank, would require a provision in the allowance as follows:

   5.7. The amount of $930,000 representing the Bank's allowance is inadequate in relation to the excessive risk contained in the Bank's loan portfolio.
   5.8. The underfunding of the Bank's allowance is attributable to the failure of the lending officials of the Bank to adequately assess and identify the risks in the Bank's loan portfolio.
   5.9. As of July 30, 1990, the Bank's internal watch list identified only 64 percent of the dollar volume of the loans subject to adverse classification as of August 10, 1990.
   5.10. That Bank's watch list as of July 30, 1990 identified only $338,000 of loss exposure to the Bank which is less than one-half of the loans classified "Loss" by the FDIC examiners as of August 10, 1990.
   5.11. As of August 10, 1990, the Bank's allowance was inadequate to absorb future losses for the Bank's remaining criticized loans, and loans which were not criticized.
   5.12. As of August 10, 1990, a provision in excess of $430,000 was necessary to increase the Bank's allowance to a level commensurate with the degree of risk contained within the Bank's loan portfolio.
   5.13. Failing to provide and maintain an adequate allowance to protect a bank from future losses is contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a bank, its shareholders, or the agencies administering the insurance funds.

Funds Management

   6.1. As of August 10, 1990, The Bank's assets subject to interest rate adjustment within three months equaled $15,190,000.
   6.2. As of August 10, 1990, the Bank's liabilities subject to interest rate adjustment within three months equaled $24,269,000.
   6.3. As of August 10, 1990, the Bank's rate-sensitive assets as a percent of rate-sensitive liabilities for the three-month time period equaled 62.59 percent.
   6.4. As of August 10, 1990, the Bank's assets subject to interest rate adjustment after three months but within six months totaled $15,808,000.
   6.5. As of August 10, 1990, the Bank's liabilities subject to interest rate adjustment after three months but within six months totaled $27,357,000.
   6.6. As of August 10, 1990, the Bank's rate-sensitive assets as a percent of rate-sensitive liabilities for this described above six-month time period equaled 57.78 percent.
   6.7. As of August 10, 1990, the Bank's assets subject to interest rate adjustment after six months but within twelve months totaled $20,403,000.
   6.8. As of August 10, 1990, the Bank's liabilities subject to interest rate adjustment after six months but within twelve months totaled $30,648,000.
   6.9. As of August 10, 1990, the Bank's rate-sensitive assets as a percent of rate-sensitive liabilities for this described above twelve-month period equaled 66.57 percent.
   6.10. The Bank's higher volume of rate-sensitive liabilities to rate-sensitive assets in the three-month, six-month, and twelve-month time periods results in the Bank being "liability-sensitive" for these respective time periods.
   6.11. For a bank in a "liability-sensitive" position, should interest rates rise, the cost of repriced liabilities will increase.
   6.12. For a bank in a "liability-sensitive" position, should interest rates rise, the increased income from repriced assets will be less than the increased expense on the repriced liabilities.
   6.13. While a decrease in interest rate could enhance the income of a bank in a "liability-sensitive" position, it is generally accepted standard of prudent bank operation to not speculate on the direction of interest rate fluctuations.
   6.14. The generally accepted standards of prudent bank operation for funds management provide for an acceptable range of rate-sensitive assets to rate-sensitive liabilities,
{{5-31-92 p.A-1947}}repriceable in a given time period, of 0.80 to 1.20.
   6.15. The Bank's practice of having significantly more rate-sensitive liabilities than rate-sensitive assets in the three-month, six-month, and twelve-month time periods is contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a bank, its shareholders, or the agencies administering the insurance funds.

Inadequate Operating Income

   7.1. For the calendar year 1987, the Bank had negative earnings of $389,000.
   7.2. For the calendar year 1988, the Bank had negative earnings of $428,000.
   7.3. For the calendar year 1989, the Bank had negative earnings of $1,228,000.
   7.4. For the period beginning January 1, 1990, up to an including August 10, 1990, the Bank had negative earnings of $567,000.
   7.5. For the above-stated period in 1990, the Bank failed to provide for an adequate allowance, which failure resulted in a significant understatement of the net loss for this period.
   7.6. Large operating losses from 1987 to present have impaired the Bank's capital.
   7.7. The risk within the asset structure of the Bank continues to cause large operating losses, further diminishing capital.
   7.8. On July 30, 1990, a $1,000,000 capital injection occurred.
   7.9. The July 30, 1990 capital injection increased the Bank's total equity capital to only the most minimal acceptable level.
   7.10. The substantial amount of assets classified "Loss" as of August 10, 1990, will absorb most of the July 30, 1990 capital contribution.
   7.11. Generally accepted standards of prudent bank operations require a bank to have positive operating income.
   7.12. The Bank's practice of operating with negative operating income is contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to a bank, its shareholders, or the agencies administering the insurance funds.

Excessive Bonuses

   8.1. In 1989 the Bank paid its president, Richard Donohoo, a salary of $85,000.
   8.2. In 1989 the Bank paid president Donohoo bonuses of $22,800.
   8.3. As of August 10, 1990, the Bank had paid bonuses during 1990, totaling $20,000, to president Donohoo.
   8.4. In 1989 the Bank paid its executive vice president Craig Mathies, a salary of $85,000.
   8.5. In 1989 the Bank paid executive vice president Mathies bonuses of $22,800.
   8.6. As of August 10, 1990, the Bank had paid bonuses during 1990, totaling $20,000, to executive vice president Mathies.
   8.7. These bonuses paid in 1989 and 1990 were excessive when also considering the level of salary compensation for these officers and the Bank's negative operating income.
   8.8. Payment of excessive or even substantial bonuses at times when a bank is suffering negative earnings, is contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to such bank, its shareholders, or the agencies administering the insurance funds.

Violations of Law

Holding Company Receivable

   9.1. At all times pertinent to this proceeding, Capital City Corporation ("CCC") was a one-bank holding company existing and doing business under the laws of the State of Minnesota.
   9.2. At all times pertinent to this proceeding, CCC owned, controlled, or had the power to vote at least 48.6 percent of the voting securities of the Bank.
   9.3. For the tax years 1984 through 1987, the Bank and CCC filed consolidated Federal income tax returns.
   9.4. During 1984 through 1987, the Bank made tax benefit payments in excess of $221,917 to CCC based on the Bank's taxable income.
   9.5. The Bank made such tax benefit payments to CCC in amounts that the Bank would have paid if the Bank had filed its returns on a separate return basis.
   9.6. By year end of the 1987 tax year, the
{{5-31-92 p.A-1948}}Bank incurred a pre-tax net operating loss of approximately $631,000 for that year.
   9.7. If the Bank had filed its return on a separate return basis, the Bank could have applied the pre-tax net operating loss against income of prior years and received a refund of previously paid income taxes of approximately $221,917.
   9.8. The Bank and CCC were advised in March 1988, by their accounting firm, that the Bank was entitled to a tax benefit refund from CCC in the approximate amount of $221,917 for the refund the Bank would have received if it filed its tax returns on a separate return basis.
   9.9. The consolidated 1987 tax return for the Bank and CCC was prepared as of April 14, 1988.
   9.10. On or about June 9, 1988, a determination was made by the Bank that the $221,917 tax benefit refund amount could not be immediately paid by CCC to the Bank.
   9.11. On June 9, 1988, the Bank recorded the $221,917 amount as an account receivable owed by CCC to the Bank.
   9.12. On June 30, 1988, the Bank removed this $221,917 account receivable owed to the Bank by CCC from the Bank's "on ledger" books.
   9.13. Upon the determination that the Bank was entitled to receive the above-described refund from CCC and that such amount could not be restored to the Bank immediately, an extension of credit was made by the Bank to CCC.
   9.14. The Bank has never charged interest on this $221,917 account receivable owed by CCC.
   9.15. The Bank has never obtained any collateral from CCC to secure payment of this $221,917 account receivable.
   9.16. The Bank's failure to charge interest on the extension of credit made by the Bank to CCC through this $221,917 account receivable, and its failure to obtain any collateral to secure payment of said extension of credit, were terms substantially less favorable to the Bank than the terms in comparable transactions between the Bank and nonaffiliates, or terms that would be offered to nonaffiliates, at the time of this transaction.

Pentagon Park Associates Loan

   9.17. On July 31, 1990, the Bank made an extension of credit in the amount of $485,000 to Pentagon Park Associates.
   9.18. This extension of credit was made pursuant to a revolving credit agreement executed on July 31, 1990.
   9.19. The extension of credit of $485,000 was made by funding the full amount of the line of credit on July 31, 1990, pursuant to the above-described revolving credit agreement.
   9.20. The application for this line of credit was made on July 25, 1990.
   9.21. At all times pertinent, including July 25 through July 31, 1990, Pentagon Park Associates was owned 95 percent by Cheryl Godbout-Bandal.
   9.22. On July 30, 1990, Cheryl Godbout-Bandal acquired approximately 15 percent of the Bank's issued and outstanding stock.
   9.23. The findings of fact above, pertaining to the hazardous lending and lax collection practices pertaining to this loan fully set forth the basis for the adverse classification for this extension of credit as "Substandard" and that such basis existed at the time the extension of credit was made.
   9.24. At the time it was made, this extension of credit to Pentagon Park Associates involved more than a normal risk of repayment and had other unfavorable features.
   9.25. For purposes of section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b), the Bank's capital and unimpaired surplus as of July 31, 1990, equaled $3,141,000.
   9.26. For purposes of section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b), 5 percent of the Bank's capital and unimpaired surplus as of July 31, 1990, equaled $157,050.
   9.27. The Bank's extension of credit of July 31, 1990, to Pentagon Park Associates, was an extension of credit to a related interest of a principal shareholder of the Bank.
   9.28. The Bank's extension of credit of July 31, 1990, to Pentagon Park Associates exceeded $25,000 or 5 percent of the Bank's capital and unimpaired surplus.
   9.29. The Bank's board of directors did not give prior approval for the Bank to make an extension of credit of $485,000 to Pentagon Park Associates as a related interest of a principal shareholder.
{{5-31-92 p.A-1949}}
   State Violations

   9.30. As of August 10, 1990, the Bank owned investments in municipal bonds with a book value of $331,000.
   9.31. The municipal bonds owned by the Bank as of August 10, 1990, represented 2 percent of the Bank's investments in securities.
   9.32. As of August 10, 1990, the Bank did not maintain or otherwise have available, prospectuses or financial statements for any of the municipal bonds that it owned.
   9.33. As of August 10, 1990, the Bank's last annual audit report prepared under the direction of the Bank's board of directors, was prepared by the Certified Public Accounting firm of Boyum and Barenscheer and was dated October 16, 1989.
   9.34. This October 16, 1989, audit report of the Bank was inadequate because the auditors stated that they had not reviewed or made an adequate review so as to opine on the adequacy of the Bank's internal control system and bank policies.

Management

   10.1. During the period between the Bank's last FDIC examination of August 25, 1989 through the FDIC examination as of August 10, 1990, efforts employed by the Bank's management to prevent further deterioration in the Bank's loans not previously classified have proven unsuccessful.
   10.2. During this 1989–1990 time frame, the Bank's management has had some success in reducing the Bank's loans classified "Substandard" at previous examinations, however, that success has been offset by additional loss suffered by the Bank from the remaining previously classified "Substandard" loans.
   10.3. Of the Bank's $4,591,000 in loans classified "Substandard" at the last FDIC's Report of Examination of August 25, 1989, $374,000 were charged off and as of August 10, 1990, $688,000 are classified "Loss."
   10.4. A contributing factor to the Bank's excessive level of loan losses as of August 10, 1990, is Bank management's poor credit administration practices.
   10.5. As of August 10, 1990, ongoing analysis of a borrowers' financial capabilities is not a regular part of Bank credit administration as demonstrated by the volume of missing, outdated, or incomplete financial information for the Bank's borrowers.
   10.6. The Bank's numerous technical exceptions in loan documentation further illustrate Bank management's credit adminstration weaknesses.
   10.7. The lack of current loan documentation including current critical financial information for an existing borrower is an impediment to a bank's ability to develop and implement effective workout strategies for identified problem loans.
   10.8. Failure of a bank's management to effect corrections of technical exceptions on a given loan may lead to the development of greater credit risk for such loan in the future.
   10.9. As of August 10, 1990, the Bank's board of directors is comprised of only three individuals, Messrs. Donohoo, Mathies, and Rasmussen.
   10.10. During the above described 1989–1990 period, the small size of the Bank's board of directors, coupled with insider dominance, has contributed to policy and administrative weaknesses as well as insider abuses, particularly in the area of credit administration.
   10.11. As of August 10, 1990, the Bank's board of directors had not established (a) an accurate system of credit risk rating, (b) had not enforced credit file documentation standards, nor (c) provided for an adequate loan loss reserve.
   10.12. At the conclusion of the 1989 FDIC examination, the Bank's board of directors made a commitment to FDIC examiners to increase the number of the Bank's directors, with additional individuals to be sought immediately.
   10.13. As of August 10, 1990, only one specific individual was approached to serve on the Bank's board of directors since the conclusion of the Bank's 1989 FDIC examination.
   10.14. The nature and circumstances associated with the Bank's violations of law as of August 10, 1990, negatively impact the assessment of the Bank's management.
   10.15. The payment of bonuses to the Bank's senior officers despite the Bank's large operating losses in 1989 and 1990 shows that the Bank's management has been less than prudent in its compensation decisions.
{{5-31-92 p.A-1950}}
   10.16. The concept of rewarding senior bank management monetarily for large operating losses is generally an unacceptable practice.
   10.17. The FDIC has given the Bank a Uniform Composite Rating of 4.
   10.18. A Uniform Composite Rating of 4 is defined in the FDIC's Statement of Policy entitled "Uniform Financial Institutions Rating System," as follows:

   10.19. The Bank has been operated with management whose policies and practices have been detrimental to the Bank and jeopardize the safety of the Bank's deposits.
   10.20. The policies and practices of the Bank's management that have been detrimental to the Bank and that have jeopardized the Bank's deposits are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to such bank, its shareholders, or the agencies administering the insurance funds.
   10.21. The Bank has been operated with a board of directors which has failed to provide adequate supervision and direction to the active management of the Bank so as to prevent the occurrence of unsafe or unsound practices and violations of law.
   10.22. The failure of the Bank's board of directors to provide adequate supervision and direction to the active management of the Bank is contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to such bank, its shareholders, or the agencies administering the insurance funds.

Relief

   11.1. Based upon the contents of the Report of Examination as of August 10, 1990, the FDIC concluded that the Bank was a financial institution with severe problems and an extreme risk to the insurance fund.
   11.2. The FDIC's purpose in seeking an order to cease and desist under section 8(b) of the Federal Deposit Insurance Act is to rehabilitate the Bank by providing an enforceable operating plan that upon implementation and compliance, would facilitate the Bank in operating as a safe and sound institution.
   11.3. The Bank needs to have and retain qualified management, including a qualified chief executive office and a qualified senior lending officer, with the type of qualifications set forth in the order sought by the FDIC.
   11.4. The Bank needs to establish a management plan substantially in the form set forth in the order sought by the FDIC.
   11.5. The Bank needs the benefit of a majority of its board of directors being "independent directors" as set forth in the order sought by the FDIC.
   11.6. The Bank needs to eliminate from its books by the manner set forth in the order sought by the FDIC, all assets or portions of assets classified "Loss" as of August 10, 1990.
   11.7. For assets that are an extension of credit or lease, the Bank needs to increase its allowance by an amount equal to 50 percent to those assets or portions of assets classified "Doubtful" as of August 10, 1990, in the manner prescribed in the order sought by the FDIC.
   11.8. The Bank needs to maintain an adequate allowance for loan and lease losses in the manner prescribed in the proposed order sought by the FDIC.
   11.9. The Bank requires a minimum total equity capital, exclusive of the allowance, at or in excess of 6 percent of the Bank's total assets.
   11.10. The Bank needs to establish a written plan of action to lessen the Bank's risk position on each line of credit aggregating $50,000 or more which was classified "Substandard" or "Doubtful" as of August 10,
{{5-31-92 p.A-1951}}1990 and such plan needs to be as prescribed in the order sought by the FDIC.
   11.11. The Bank needs to be precluded from making new loans to borrowers whose loans are charged-off or classified, in whole or in part, "Loss," "Doubtful," "Substandard," and uncollected, unless the terms of paragraph 6 of the other sought by the FDIC are complied with.
   11.12. The Bank needs to revise its written loan policies and thereafter strictly adhere to such policies.
   11.13. The Bank needs to establish a written profit plan, with the minimum requirements set forth in the order sought by the FDIC.
   11.14. The Bank needs to develop a written funds management policy, with the minimum requirements set forth in the order sought by the FDIC.
   11.15. In conjunction with the maintenance of capital, it is necessary to prohibit the Bank from paying dividends without the FDIC's consent because the Bank has been operating at a deficit.
   11.16. Because of the Bank's negative earnings and need to maintain capital, it is necessary to prohibit the payment of bonuses and excessive salaries to "senior executive officers."
   11.17. The Bank needs to comply with the shareholder notification requirements set forth in the order sought by the FDIC.
   11.18. The Bank needs to correct the technical exceptions on loans noted in the FDIC Report of Examination of the Bank as of August 10, 1990.
   11.19. The Bank needs to eliminate and/or correct all violations of law and regulations committed by the Bank as set forth in the Conclusions of Law herein below.
   11.20. The requirements of documentation of action quarterly reporting to the FDIC in the proposed order are necessary and important monitoring tools for the FDIC which also allow the Bank to focus on compliance problems that it may have with the order to cease and desist.

CONCLUSIONS OF LAW

   12.1. The Bank is subject to the Federal Deposit Insurance Act ("Act'), 12 U.S.C. §§ 1811-1831(k), the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws, rules and regulations of the State of Minnesota.
   12.2. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding and has the authority to issue an order to cease and desist against the Bank pursuant to section 8(b) of the Act.
   12.3. The FDIC's burden of proof in this matter is one of a preponderance of the evidence.
   12.4. An "unsafe or unsound banking practice" embraces any action or lack of action which is contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds.
   12.5. The FDIC bank examiners are entitled to significant deference in their opinions and conclusions about the likelihood of a particular loan being repaid and the resulting classification of such loan, unless shown to be arbitrary or capricious or outside a zone of reasonableness.
   12.6. The FDIC bank examiners are entitled to significant deference in their opinions and conclusions about the quality of bank operating policies, and the risks associated with given practices, unless shown to be arbitrary or capricious or outside a zone of reasonableness.
   12.7. The FDIC bank examiners are entitled to significant deference in their opinions and conclusions about the quality of a bank's active management and its policies, and the risks associated with given practices, unless shown to be arbitrary or capricious or outside a zone of reasonableness.
   12.8. The FDIC Bank examiners are entitled to significant deference in their opinions and conclusions about the quality of a bank's board of directors and its policies, and the risks associated with given practices, unless shown to be arbitrary or capricious or outside a zone of reasonableness.
   12.9. As a result of the action or lack of action as of August 10, 1990, related to the Bank's adversely classified loans and the loans cited as having documentation exceptions, the Bank has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, by engaging
{{5-31-92 p.A-1952}}in hazardous lending and lax collection practices by:

   12.10. As a result of the Bank's adversely classified loans, the Bank has engaged in an unsafe or unsound banking practice, within the meaning of section 8(b) of the Act, by operating with an excessive volume of poor quality loans in relation to its total loans and in relation to its total equity capital and allowance.
   12.11. The Bank has engaged in an unsafe or unsound banking practice, within the meaning of section 8(b) of the Act, by failing to provide and maintain an adequate allowance for loan and lease losses.
   12.12. As a result of the disproportionate rate-sensitive assets to rate-sensitive liabilities in the 3, 6, and 12 month time frames, the Bank has engaged in an unsafe or unsound banking practice, within the meaning of section 8(b) of the Act, by failing to maintain an adequate percentage of rate-sensitive assets (assets maturing or subject to interest rate adjustment within the time horizon specified) to rate-sensitive liabilities (liabilities maturing or subject to interest rate adjustment within the time horizon specified).
   12.13. As a result of the operating losses from 1987 through August 10, 1990, the Bank has engaged in an unsafe or unsound banking practice, within the meaning of section 8(b) of the Act, by operating with inadequate operating income.
   12.14. The bonuses paid to Messrs. Donohoo and Mathies result in the Bank having engaged in an unsafe or unsound banking practice, within the meaning of section 8(b) of the Act, by paying excessive bonuses to senior executive officers in relation to the Bank's negative income and poor capital position.
   12.15. At all time pertinent to this proceeding, CCC was an "affiliate" of the Bank within the meaning of section 23A, 12 U.S.C. § 371c, and section 23B, 12 U.S.C. § 371c-1, and was a "principal shareholder" of the Bank, within the meaning of section 215.2(j) of Regulation O, 12 C.F.R. 215.2(j).
   12.16. The FDIC's Statement of Policy entitled "Income Tax Remittance By Banks to Holding Company Affiliates," 43 Fed. Reg. 22241 (1978), requires that tax benefit payments made by a bank to its holding company for purposes of filing a consolidated income tax return, cannot exceed more than the bank would pay in income tax if it filed its income tax return on a separate return basis.
   12.17. The FDIC's Statement of Policy entitled "Income Tax Remittance By Banks to Holding Company Affiliates," 43 Fed. Reg. 22241 (1978), requires that in the event it is determined that a bank has paid more in tax benefit payments to its holding company than it would on a separate return basis, the bank is entitled to a tax benefit reimbursement from the holding company.
   12.18. The FDIC's Statement of Policy entitled "Income Tax Remittance By Banks to Holding Company Affiliates," 43 Fed. Reg. 22241 (1978), provides that in the event the holding company cannot immediately reimburse the bank, in cash, to the extent of any tax benefit arising from the bank's losses in the consolidated return, such amount shall be recorded on the bank's books as a loan to the parent company and an appropriate level of interest charged, and shall be subject to the provisions of section 18(j) of the Act.
   12.19. At some time after the Bank became aware of the tax benefit reimbursement owed by CCC to the Bank in March 1988, and no later than June 9, 1988, an extension of credit was made by the Bank to CCC in the approximate amount of $221,917.
   12.20. The Bank violated section 23(A)(c)(1) of the Federal Reserve Act, 12 U.S.C. § 371c(c)(1), in that the extension of credit for the unpaid tax benefit reimbursement was not secured at the time of the transaction.
   12.21. The Bank violated section 23(B)(a)(1) of the Federal Reserve Act, 12 U.S.C. § 371c-1(a)(1), in that the Bank's failure to charge interest on the above described extension of credit to CCC, and fail-
{{5-31-92 p.A-1953}}ure to obtain any collateral to secure payment of said extension of credit, were terms substantially less favorable to the Bank than terms in comparable transactions between the Bank and nonaffiliates, or that would be offered to nonaffiliates, at the time of the transaction.
   12.22. The Bank violated section 215.4(a) of Regulation O, 12 C.F.R. § 215.4(a), in that the Bank's failure to charge any interest on the above-described extension of credit to CCC, and failure to obtain any collateral to secure payment of said extension of credit, were terms substantially less favorable to the Bank than such terms in comparable transactions between the Bank and other persons who are not covered by said regulation and who are not employed by the Bank.
   12.23. On July 30, 1990, Cheryl Godbout-Bandal became a "principal shareholder" of the Bank, within the meaning of section 215.2(j) of Regulation O, 12 C.F.R. § 215.2(j).
   12.24. At all time pertinent to this proceeding, a partnership known as "Pentagon Park Associates" was a "related interest" of Cheryl Godbout-Bandal, within the meaning of section 215.2(k) of Regulation O, 12 C.F.R. § 215.2(k).
   12.25. On July 31, 1990, the Bank made an extension of credit in the amount of $485,000 to Pentagon Park Associates.
   12.26. The extension of credit to Pentagon Park Associates on July 31, 1990, was made without the Bank's board of directors' prior approval for such extension of credit to a related interest of a principal shareholder of the Bank.
   12.27. The extension of credit made by the Bank to Pentagon Park Associates violated section 215.4(a) of Regulation O, 12 C.F.R. § 215.4(a), in that said extension of credit was poorly documented as to the value of the collateral and repayment ability of the borrower and exhibits more than the normal degree of risk of repayment ability of the borrower and exhibits more than the normal degree of risk of repayment and had other unfavorable features.
   12.28. By reason of the extension of credit to Pentagon Park Associates, the Bank violated section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b), in that the extension of credit of $485,000 was to a related interest of a principal shareholder which exceeded $25,000, or 5 percent of the Bank's capital and unimpaired surplus, and was made without the Bank's board of directors' prior approval of such an extension of credit to a related interest of a principal shareholder.
   12.29. The Bank violated Minnesota Rule 2675.1100, for failure to have prospectuses or financial statements for the municipal bonds in its portfolio.
   12.30. The Bank violated Minnesota Rule 2675.2610, for failure to have, as indicated in its' annual audit report, dated October 16, 1989, a review of the adequacy of the Bank's internal control system and Bank policies.
   12.31. The Bank has engaged in the unsafe or unsound banking practice, within the meaning of section 8(b) of the Act, by operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of the Bank's deposits by virtue of allowing the previously described unsafe and unsound banking practices and violations of law.
   12.32. The Bank has engaged in the unsafe and unsound banking practice, within the meaning of section 8(b) of the Act, by operating with a board of directors which has failed to provide adequate supervision and direction to the active management of the Bank, so as to prevent the unsafe or unsound practices and violations of law described above.
   12.33. The FDIC is entitled to an order to cease and desist as authorized under section 8(b) of the Act, in the form proposed by the FDIC, in that the provisions of such order are supported by substantial evidence in this matter on the record.
   Upon the foregoing findings of fact and conclusions of law, I hereby issue the following recommended order:

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 and unsound banking practices and violations of law and/or regulations:
   A. operating with an excessive volume of adversely classified assets;
   B. engaging in hazardous lending and lax collection practices, including maintaining
{{5-31-92 p.A-1954}}an excessive volume of adversely classified loans;
   C. operating with inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   D. engaging in violations of applicable laws and regulations;
   E. operating with management whose policies and practices are detrimental to the Bank;
   F. operating with deficient or inadequate loan documentation, including but not limited to current financial statements, insurance coverage, appraisals, title searches or legal opinions, and cash flow and/or operating information;
   G. engaging in practices which produce inadequate operating income;
   H. engaging in practices which produce excessive loan losses;
   I. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices; and
   J. paying excessive bonuses in relation to the Bank's net income and/or capital position.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

(b) The board of directors shall in no than 30 days from the effective date of this ORDER develop a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:

   (e) Effective the date of this ORDER, the Bank's board of directors shall meet at least monthly. The board shall prepare in advance and shall follow a detailed written agenda at each meeting, which shall include consideration of actions of any committees. Nothing in the foregoing sentence shall preclude the board from considering matters other than those contained in the agenda. Detailed written minutes of all board meetings shall be maintained and recorded on a timely basis.
   2. No more than 10 days from the effective date of this ORDER, the Bank: (a) shall eliminate from its books, by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss" as of August 10, 1990, and (b) shall either (i) eliminate from its books by charge-off, collection, or other proper entries, or (ii) if the asset is an extension of credit or lease, increase its allowance for loan and lease losses by an amount equal to 50 percent of those assets or portions of assets classified "Doubtful" as of August 10, 1990, which have not been previously collected, charged off, or otherwise eliminated by other proper entries. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph.
3. (a) (i) No later than March 31, 1991, the Bank shall have a total equity capital, exclusive of the allowance for loan and lease losses required to be main- {{5-31-92 p.A-1956}}tained in accordance with paragraph 4 of this ORDER, at or in excess of 6 percent of the Bank's total assets ("equity capital ratio") and shall thereafter maintain its equity capital ratio at or in excess of such level as calculated herein while this ORDER is in effect. The terms "total equity capital" and "total assets" shall have the same meaning as those terms have in the prevailing Instructions for Preparation of Reports of Condition ("Instructions").
   (ii) Commencing March 31, 1991, the equity capital ratio shall be calculated as of Report Date, as that term is used in the Instructions. For the purpose of calculating the equity capital ratio as of a given Report Date:

   (b) If, during the period this ORDER is in effect, the equity capital ratio, exclusive of the allowance for loan and lease losses, declines below 6 percent, the Bank, within 30 days after the date on which the said ratio so declined, shall develop and implement a written plan so declined, shall develop and implement a written plan to increase such ratio up to or in excess of 6 percent and the Bank shall thereafter maintain its equity capital ratio at or in excess of such level as calculated herein 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 with the capital requirements of paragraphs 3(a) and 3(b) of this ORDER.
   4. (a) The Bank shall maintain an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions.
   (b) Reports of Condition and Income required to be submitted by the Bank as of each Report date, as that term is used in the Instructions, between and including August 10, 1990, and the effective date of this ORDER, shall, at a minimum, reflect an allowance for loan and lease losses that should have been maintained in accordance with the Instructions. If necessary to comply with this paragraph, the Bank shall file amended Reports of Condition and Income within 10 days from the effective date of this ORDER.
   (c) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the board of directors of the Bank shall: (i) review the adequacy of the Bank's allowance for loan and lease losses, (ii) provide for an adequate allowance, and (iii) accurately report the allowance in any such Report of Condition and Income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the allowance, and the basis for determining the amount of allowance provided.
   5. (a) Within 30 days from the effective date of this ORDER, the board of directors shall develop a written plan of action to lessen the Bank's risk position in each line of credit aggregating $50,000 or more which was classified "Substandard" or "Doubtful" as of August 10, 1990. In developing such plan, the Bank shall, at a minimum:

Based upon such review and evaluation, the written plan of action shall: (A) establish target dollar levels to which the Bank shall reduce the aggregate dollar volume of "Substandard" or "Doubtful" classifications within 6 and 12 months from the effective date of this ORDER; and (B) provide for the submission of written {{5-31-92 p.A-1957}}monthly progress reports to the Bank's board of directors for review and notation in the board minutes. 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 FDIC.
   (b) The written plan of action described by paragraph 5(a) and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner of Commerce for the State of Minnesota (the "State Commissioner") for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written plan of action, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written plan of action and/or any subsequent modification.
   6. Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected, unless a majority of the Bank's board of directors first (a) determines that such advance is in the best interest of the Bank, (b) determines that the Bank has satisfied the requirements set out in paragraph 5 of this ORDER as to such borrower, and (c) approves such advance. A written record of the board of directors' determination and approval of any advance under the terms of this paragraph shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the board of directors. The requirements of this paragraph do not prohibit the Bank from renewing any credit already extended to the borrower.
   7. No more than 90 days from the effective date of this ORDER, the Bank shall revise its written loan policies. The revised written loan policies and any subsequent modification thereto shall be submitted to the Regional Director and the State Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written loan policies and/or any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written loan policies and/or any subsequent modification thereto.
8. (a) No more than 30 days from the effective date of this ORDER, the Bank shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:

(b) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the State Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan and any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written profit plan and/or any subsequent modification thereto.
9. (a) No more than 30 days from the effective date of this ORDER, the Bank shall develop a written funds management policy which shall, at a minimum:

   (b) The funds management policy shall be coordinated with the Bank's loan, investment, operating, and budget and profit planning policies.
   (c) The written funds management policy and any subsequent modification thereto shall be submitted to the Regional Director and the State Commissioner for review and comment. No more than 30 days from the receipt of any comment from the Regional Director, the board of directors shall approve the written funds management policy and any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written funds management policy and/or any subsequent modification thereto.
   10. The Bank shall not pay or declare any cash dividends without the prior written consent of the Regional Director and the State Commissioner.
   11. During the period this ORDER is in effect, the Bank shall not pay, directly or indirectly, to any senior executive officer:

For purposes of this paragraph, "senior executive officer" means the same as the definition of the phrase in Section 303.14(a)(3) of the FDIC's Rules and Regulations, 12 C.F.R. § 303.14(a)(3), except the meaning of the phrase is limited to only senior executive officers who are also shareholders and/or directors of the Bank.
   12. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (a) in conjunction with the Bank's next shareholder communication, and also (b) 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 respect. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429, for review at least 20 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.
   13. No more than 60 days from the effective date of this ORDER, the Bank shall
{{6-30-92 p.A-1959}}correct the technical exceptions on loans noted on pages 2-d through 2-d-2 of the FDIC's Report of Examination of the Bank as of August 10, 1990.
   14. No more than 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulations committed by the Bank as described on pages 6-1 through 6-1-a of the FDIC's Report of Examination of the Bank as of August 10, 1990.
   15. The Bank shall furnish written progress reports to the Regional Director and the State Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof every 90 days, beginning 90 days from the effective date of this ORDER. In addition, the Bank shall furnish such reports on request of either the Regional Director or the State Commissioner. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   16. The FDIC Cease and Desist Order FDIC-84-131b, issued to the Bank effective August 20, 1984, shall remain in full force and effect and by its terms continue to be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, and is in no way modified, terminated, suspended or set aside by the provisions of this ORDER.
   17. This ORDER shall become effective 10 days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank and its institution-affiliated parties, successors and assigns.
   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.
   Done on the record at Kansas City, Missouri, the 4th day of November, 1991.

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