Exhibit 10.1
 
 

FEDERAL DEPOSIT INSURANCE CORPORATION
 
WASHINGTON, D.C.
 
WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONS
 
OLYMPIA, WASHINGTON
 
 

     
 
In the Matter of
 
FIRST SAVINGS BANK NORTHWEST
RENTON, WASHINGTON
 
(INSURED STATE NONMEMBER BANK)
 
)
)
)
)
)
)
)
)
 
CONSENT ORDER
 
FDIC-10-524b

The Federal Deposit Insurance Corporation ("FDIC") is the appropriate Federal
banking agency for First Savings Bank Northwest, Renton, Washington ("Bank")
under Section 3(q) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §
1813(q)(3). The Washington Department of Financial Institutions ("WDFI") is the
appropriate State banking agency for the Bank under Title 32 of the Revised Code
of Washington ("RCW").
The Bank, by and through its duly elected and acting Board of Directors
("Board"), has executed a Stipulation to the Issuance of a Consent Order
("Stipulation"), dated September 22, 2010, that is accepted by the FDIC and the
WDFI. With the Stipulation, the Bank has consented, without admitting or denying
any charges of unsafe or unsound banking practices relating to, among other
things, the Bank's asset quality, earnings and, management, to the issuance of
this Consent Order ("Order") by the FDIC and the WDFI pursuant to Section
8(b)(1) of the FDI Act, and RCW Anno. § 32.04.250.

 
 

--------------------------------------------------------------------------------

 
 
 

-2- 

 
 
Having determined that the requirements for issuance of an order under Section
8(b) of the FDI Act, 12 U.S.C. § 1818(b), and RCW have been satisfied, the FDIC
and the WDFI hereby order that:
1.    The Bank shall have and retain qualified management.
       (a)    Each member of management shall have qualifications and experience
commensurate with his or her duties and responsibilities at the Bank. Management
shall include the following: (i) a chief executive officer with proven ability
in managing a bank of comparable size and risk profile; (ii) a chief financial
officer with proven ability in all aspects of financial management; and (iii) a
senior lending officer with significant lending, collection, and loan
supervision experience and experience in upgrading a low quality loan portfolio.
Each member of management shall be provided appropriate written authority from
the Board to implement the provisions of this Order.
                              (b)    The qualifications of management shall be
assessed on its ability to:
                                               (i)       comply with the
requirements of this Order;
                                               (ii)  operate the Bank in a safe
and sound manner;
                                               (iii)     comply with applicable
laws and regulations; and
                                              (iv)     restore all aspects of
the Bank to a safe and sound condition, including asset quality, capital
adequacy, earnings, management effectiveness, liquidity, and sensitivity to
market risk.
                              (c)    During the life of this Order, the Bank
shall notify the Regional Director of the FDIC's San Francisco Regional Office
("Regional Director") and the Director of Banks of the Washington Department of
Financial Institutions ("Director of Banks") in writing when it proposes to add
or replace any individual on the Board, or employ any individual to serve as a

 
 

--------------------------------------------------------------------------------

 
 

-3- 

 
senior executive officer, or change the responsibilities of any existing senior
executive officer to include the responsibilities of another senior executive
officer position. The term "senior executive officer" shall have the same
meaning ascribed to it in Part 303 of the FDIC's Rules and Regulations, 12
C.F.R. § 303.101. The notification shall include a completed Interagency
Biographical and Financial Report and Interagency Change in Director or Senior
Executive Officer and must be received at least 30 days before the addition,
employment or change of responsibilities is intended to become effective. The
Regional Director and the Director of Banks shall have the power under the
authority of this Order to disapprove the addition, employment or change of
responsibilities of any proposed officer or director.
        (d)    The requirement to submit information and the prior disapproval
provisions of this paragraph are based upon the authority of 12 U.S.C. § 1818(b)
and do not require the Regional Director and the Director of Banks to complete
their review and act on any such information or authority within 30 days, or any
other timeframe. The Bank shall not add, employ or change the responsibilities
of any proposed director or senior executive officer until such time as the
Regional Director and the Director of Banks have completed their review.
    2.            Within 30 days from the effective date of this Order, the
Board shall increase its participation in the affairs of the Bank, assuming full
responsibility for the approval of sound policies and objectives and for the
supervision of all of the Bank's activities, consistent with the role and
expertise commonly expected for directors of banks of comparable size. This
participation shall include meetings to be held no less frequently than monthly
at which, at a minimum, the following areas shall be reviewed and approved:
reports of income and expenses; new, overdue, renewal, insider, charged-off, and
recovered loans; investment activity; liquidity and funds managements
activities; operating policies; and individual committee actions. The

 
 

--------------------------------------------------------------------------------

 

 

-4- 

 
Board minutes shall document these reviews and approvals, including the names of
any dissenting directors.
3.  Within 90 days from the effective date of this Order, the Board shall obtain
an independent study of the management and personnel structure of the Bank to
determine whether the Bank is staffed by qualified individuals commensurate with
its size and risk profile to ensure the safe and profitable operation of the
Bank. Such study shall include, at a minimum, a review of the duties,
responsibilities, qualifications, and remuneration of the Bank's officers, an
evaluation of management resources, and recommendations regarding management and
staffing in the context of the Bank's strategic plan. A copy of the study shall
be submitted to the Regional Director and the Director of Banks. The Board shall
adopt a plan to implement the recommendations of the study. The plan policy and
its implementation shall be satisfactory to the Regional Director and the
Director of Banks as determined at subsequent examinations and/or visitations.
4.  (a)            Within 30 days from the effective date of this Order, the
Bank shall increase and thereafter maintain its Tier 1 capital in such an amount
to ensure that the Bank's leverage ratio equals or exceeds 10 percent.
         (b)   Within 30 days from the effective date of this Order, the Bank
shall maintain its total risk-based capital ratio in such an amount as to equal
or exceed 12 percent.
         (c)   Within 60 days from the effective date of this Order, the Bank
shall develop and adopt a plan to meet and maintain the capital requirements of
this Order and to comply with the FDIC's Statement of Policy on Risk-Based
Capital contained in Appendix A to Part 325 of the FDIC's Rules and Regulations,
12 C.F.R. Part 325, Appendix A. Such plan and

 
 

--------------------------------------------------------------------------------

 

 

-5- 

 
 
its implementation shall be in a form and manner acceptable to the Regional
Director and the Director of Banks as determined at subsequent examinations
and/or visitations.
(d)  The level of capital to be maintained during the life of this Order shall
be in addition to a fully funded allowance for loan and lease losses, the
adequacy of which shall be satisfactory to the Regional Director and the
Director of Banks as determined at subsequent examinations and/or visitations.
Any increase in Tier 1 capital necessary to meet the requirements of this
paragraph may not be accomplished through a deduction from the Bank's allowance
for loan and lease losses.
(e)  If all or part of the increase in capital required by this Order is
accomplished by the sale of new securities, the Board shall adopt and implement
a plan for the sale of such additional securities, including the voting of any
shares owned or proxies held or controlled by them in favor of the plan. Should
the implementation of the plan involve a public distribution of the Bank's
securities (including a distribution limited only to the Bank's existing
shareholders), the Bank shall prepare offering materials fully describing the
securities being offered, including an accurate description of the financial
condition of the Bank and the circumstances giving rise to the offering, and any
other material disclosures necessary to comply with the Federal securities laws.
Prior to the implementation of the plan and, in any event, not less than 20 days
prior to the dissemination of such materials, the plan and any materials used in
the sale of the securities shall be submitted to the FDIC, Registration,
Disclosure and Securities Unit, 550 17th St. N.W., Washington, D.C. 20429, for
review. Any changes requested by the FDIC shall be made prior to dissemination.
If the increase in capital is provided by the sale of noncumulative perpetual
preferred stock, then all terms and conditions of the issue, including but

 
 

--------------------------------------------------------------------------------

 

 

-6- 

 
 
not limited to those terms and conditions relative to interest rate and
convertibility factor, shall be presented to the Regional Director and the
Director of Banks for prior approval.
                           (f)  In complying with the provisions of this
paragraph, the Bank shall provide to any subscriber and/or purchaser of the
Bank's securities, a written notice of any planned or existing development or
other changes which are materially different from the information reflected in
any offering materials used in connection with the sale of Bank securities. The
written notice required by this paragraph shall be furnished within 10 days from
the date such material development or change was planned or occurred, whichever
is earlier, and shall be furnished to every subscriber and/or purchaser of the
Bank's securities who received or was tendered the information contained in the
Bank's original offering materials.
                            (g)  For the purposes of this Order, the terms
"leverage ratio", "Tier 1 capital" and "total risk-based capital ratio" shall
have, the meanings ascribed to them in Part 325 of the FDIC's Rules and
Regulations, 12 C.F.R. §§ 325.2(m), 325.2(v), 325.2(y), and Appendix A.
5.  The Bank shall not pay cash dividends or any other form of payment or
distribution representing a reduction of Bank capital without the prior written
approval of the FDIC. All requests for prior approval shall be received by the
FDIC at least thirty (30) days prior to the earlier of the proposed declaration
or distribution date.
6.  (a)         Within 30 days from the effective date of this Order, the Bank
shall eliminate from its books, by charge-off or collection, all assets
classified "Loss" and one-half of the assets classified "Doubtful" in the ROE
that have not been previously collected or charged off. Elimination of these
assets through proceeds of other loans made by the Bank is not considered
collection for the purpose of this paragraph.

 
 

--------------------------------------------------------------------------------

 

 

-7- 

 
(b)  Within 180 days from the effective date of this Order, the Bank shall have
reduced the assets classified "Substandard" in the ROE, that have not previously
been charged off to not more than 65 percent of the Bank's Tier 1 capital and
ALLL as of the ROE effective date of December 31, 2009.
(c)  The requirements of this paragraph are not to be construed as standards for
future operations and, in addition to the foregoing, the Bank shall eventually
reduce the total of all adversely classified assets. Reduction of these assets
through proceeds of other loans made by the Bank is not considered collection
for the purpose of this paragraph. As used in this paragraph the word "reduce"
means:
(i)        to collect;
(ii)       to charge-off; or
(iii)  to sufficiently improve the quality of assets adversely classified to
warrant removing any adverse classification, as determined by the FDIC and the
WDFI.
7.            Within 60 days from the effective date of this Order, the Board
shall review the appropriateness of the Bank's allowance for loan and lease
losses ("ALLL") and revise or establish a comprehensive policy for determining
an appropriate level of the ALLL, including documenting its analysis according
to the standards set forth in the July 25, 2001 Interagency Policy Statement on
Allowance for Loan and Lease Losses Methodologies and Documentation for Banks
and Savings Associations. For the purpose of this determination, an appropriate
ALLL shall be determined after the charge-off of all loans or other items
classified "Loss." The policy shall provide for a review of the ALLL at least
once each calendar quarter. Said review shall be completed in order that the
findings of the Board with respect to the ALLL are properly reported in the
quarterly Reports of Condition and Income. The review shall focus on the

 
 

--------------------------------------------------------------------------------

 

 

-8- 

 
accounting standards set forth in the Financial Accounting Standards Board
Accounting Standards Codification ("ASC") 450 (formerly known as FAS 5) and ASC
310-40 (formerly known as FAS 114), the results of the Bank's internal loan
review, loan and lease loss experience, trends of delinquent and non-accrual
loans, an estimate of potential loss exposure of significant credits,
concentrations of credit, and present and prospective economic conditions. A
deficiency in the ALLL shall be remedied in the calendar quarter it is
discovered, prior to submitting the Report of Condition, by a charge to current
operating earnings. The minutes of the Board meeting at which such review is
undertaken shall indicate the results of the review. The Bank's policy for
determining the adequacy of the Bank's ALLL and its implementation shall be
satisfactory to the Regional Director and the Director of Banks as determined at
subsequent examinations and/or visitations.
      8.            (a)    Beginning with the effective date of this Order, the
Bank shall not extend, directly or indirectly, any additional credit to, or for
the benefit of, any borrower who has a loan or other extension of credit from
the Bank that has been charged off or classified, in whole or in part, "Loss"
and is uncollected. This paragraph shall not prohibit the Bank from renewing or
extending the maturity of any credit in accordance with the Financial Accounting
Standards Board ("FASB") Accounting Standards Codification 470-60 ("ASC
470-60"), formerly known as FASB Statement Number 15 ("FAS 15").
              (b)    Beginning with the effective date of this Order, the Bank
shall not extend, directly or indirectly, any additional credit to, or for the
benefit of, any borrower who has a loan or other extension of credit from the
Bank that has been classified, in whole or part, "Doubtful" or Substandard"
without the prior approval of a majority of the Board or loan committee of the

 
 

--------------------------------------------------------------------------------

 

 

-9- 

 
Bank. The Board and loan committee shall not approve any extension of credit or
additional credit to such borrowers without first collecting in cash all past
due interest.
9.  (a)     Within 90 days from the effective date of this Order, the Bank shall
develop or revise, adopt, and implement written lending and collection policies
and practices to provide effective guidance and control over the Bank's lending
function, including an accurate and timely loan grading system. Such policies,
practices, and their implementation shall be satisfactory to the Regional
Director and the Director of Banks as determined at subsequent examinations
and/or visitations.
         (b)      The initial revisions to the Bank's loan policy and practices
required by this paragraph shall, at a minimum, address all credit
administration and underwriting recommendations noted in the ROE, including
prudent limits on and adequate oversight of loans to one borrower or closely
related borrowers.
10.  Within 60 days from the effective date of this Order, the Bank shall
develop or revise, adopt, and implement a written plan, approved by its Board
and acceptable to the Regional Director and the Director of Banks for
systematically reducing the amount of loans or other extensions of credit
advanced, directly or indirectly, to or for the benefit of, any borrowers in the
"Commercial Real Estate" Concentration. Such plan shall be in conformance with
Appendix A of Part 365 of the FDIC's Rules and Regulations, 12 C.F.R. Part 365,
Appendix A; and Financial Institution Letter (FIL)-104-2006, Commercial Real
Estate Lending Joint Guidance, dated December 12, 2006.
11.  Within 60 days from the effective date of this Order, the Bank shall
develop or revise, adopt, and implement a written liquidity and funds management
policy that adequately addresses liquidity needs and appropriately reduces its
reliance on non-core funding sources.

 
 

--------------------------------------------------------------------------------

 
 

-10- 

 
Such policy and its implementation shall be satisfactory to the Regional
Director and the Director of Banks as determined at subsequent examinations
and/or visitations.
12.           Within 60 days from the effective date of this Order, the Bank
shall develop or revise, adopt, and implement a written three-year strategic
plan. Such plan shall be submitted to the Regional Director and the Director of
Banks and shall include specific goals for the dollar volume of total loans,
total investment securities, and total deposits as of year-end 2010, 2011, and
2012. For each time frame, the plan will also specify:
(a)  the anticipated average maturity and average yield on loans and securities;
(b)  the average maturity and average cost of deposits;
(c)  the level of earning assets as a percentage of total assets; and
(d)  the ratio of net interest income to average earning assets.
Such plan and its implementation shall be satisfactory to the Regional Director
and the Director of Banks as determined at subsequent examinations and/or
visitations.
13.          During the life of this Order, the Bank shall comply with the
provisions of section 337.6 of the FDIC's Rules and Regulations, 12 C.F.R. §
337.6.
14.           Within 60 days from the effective date of this Order, the Bank
shall eliminate and/or correct all violations of law, as more fully set forth in
the ROE. In addition, the Bank shall take all necessary steps to ensure future
compliance with all applicable laws and regulations.
                   15.    Within 30 days of the end of the first quarter
following the effective date of this Order, and within 30 days of the end of
each quarter thereafter, the Bank shall furnish written progress reports to the
Regional Director and the Director of Banks detailing the form and manner of any
actions taken to secure compliance with this Order and the results thereof. Such

 
 

--------------------------------------------------------------------------------

 
 

-11- 

 
reports shall include a copy of the Bank's Reports of Condition and Income. Such
reports may be discontinued when the corrections required by this Order have
been accomplished and the Regional Director and the Director of Banks have
released the Bank in writing from making further reports.
 
     16.   Following the effective date of this Order, the Bank shall provide a
copy of the Order or otherwise furnish a description of the Order to its
shareholder(First Financial Northwest, Inc.) in conjunction with the next board
meeting of First Financial Northwest, Inc. in which case such description shall
fully describe the Order in all material respects. The description and any
accompanying communication, statement, or notice shall be sent to the FDIC,
Division of Supervision and Consumer Protection, Accounting and Securities
Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429, at least 20
days prior to dissemination to the shareholder. Any changes requested to be made
by the FDIC shall be made prior to dissemination of the description,
communication, notice, or statement.
          The provisions of this Order shall not bar, estop, or otherwise
prevent the FDIC, the WDFI, or any other federal or state agency or department
from taking any other action against the Bank or any of the Bank's current or
former institution-affiliated parties, as that term is defined in Section 3(u)
of the FDI Act, 12 U.S.C. § 1813(u).
          This Order will become effective upon its issuance by the FDIC and the
WDFI.
                 The provisions of this Order shall be binding upon the Bank,
its institution-affiliated parties, and any successors and assigns thereof.
          The provisions of this Order shall remain effective and enforceable
except to the extent that and until such time as any provision has been
modified, terminated, suspended, or set aside

 
 

--------------------------------------------------------------------------------

 
 

-12- 

 

by the FDIC and the WDFI.
 
Issued pursuant to delegated authority
 
Dated at San Francisco, California, this 24th day of September, 2010

 
 
 

/s/ J. George Doerr                                                             
/s/Brad Williamson                                                    
J. George Doerr
Deputy Regional Director
Risk Management
Division of Supervision and Consumer Protection
San Francisco Region
Federal Deposit Insurance Corporation
Brad Williamson
Director of Banks
Washington Department of Financial
     Institutions

 
 

--------------------------------------------------------------------------------