Exhibit 10.1

 
FEDERAL DEPOSIT INSURANCE CORPORATION

WASHINGTON, D.C.

WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONS

OLYMPIA, WASHINGTON
 

 

     

In the Matter of
 
RAINIER PACIFIC BANK
TACOMA, WASHINGTON
 

(INSURED STATE NONMEMBER BANK) 
 
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ORDER TO CEASE AND DESIST
 
FDIC-09- 521b
     

Rainier Pacific Bank, Tacoma, Washington ("Bank"), having been advised of its
right to a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound
banking practices and violations of law and/or regulations alleged to have been
committed by the Bank and of its right to a hearing on the alleged charges under
section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §
1818(b)(1), and Section 32.04.250 of the Revised Code of Washington, and having
waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF
AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal
Deposit Insurance Corporation ("FDIC"), and with counsel for the Washington
Department of Financial Institutions (“WDFI”), dated September 28, 2009, whereby
solely for the purpose of this proceeding and without admitting or denying the
alleged charges of unsafe or unsound banking practices and violations of law
and/or regulations, the Bank consented to the issuance of an ORDER TO CEASE AND
DESIST ("ORDER") by the FDIC and the WDFI.
 

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    The FDIC and the WDFI considered the matter and determined that they had
reason to believe that the Bank had engaged in unsafe or unsound banking
practices and violations of law and/or regulations.  The FDIC and the WDFI,
therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as that
term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and its
successors and assigns, cease and desist from the following unsafe and unsound
banking practices, as more fully set forth in the Joint FDIC and WDFI Report of
Examination (“ROE”) dated February 9, 2009:
(a)  operating with management whose policies and practices are detrimental to
the Bank and jeopardize the safety of its deposits;
(b)  operating with a board of directors which has failed to provide adequate
supervision over and direction to the active management of the Bank;
(c)  operating with inadequate capital in relation to the kind and quality of
assets held by the Bank;
(d)  operating with an inadequate loan valuation reserve;
(e)  operating with a large volume of poor quality loans and securities;
(f)  engaging in unsatisfactory lending and collection practices;
(g)  operating with inadequate procedures for valuing and pricing collateral
debt obligation investments;
(h)  operating with inadequate provisions for liquidity;
(i)  operating in such a manner as to produce operating losses;
 

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(j)  operating in violation of section 337.3(c)(2) of the FDIC’s Rules and
Regulations, 12 C.F.R. § 337.3(c)(2); and section 215.4(e) of Regulation O of
the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.4(e),
made applicable to state nonmember institutions by section 18(j)(2) of the Act,
12 U.S.C. § 1828(j)(2), as more fully set forth in the ROE dated February 9,
2009; and
(k)  operating in contravention of the Interagency Policy Statement on the
Allowance for Loan and Lease Losses dated December 13, 2006, as more fully set
forth in the ROE dated February 9, 2009.
IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and
its successors and assigns, take affirmative action as follows:
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.  Each
member of management shall be provided appropriate written authority from the
Bank's 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.
 
 

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(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") in writing when it proposes to add any individual to the Bank's
Board or employ any individual as a senior executive officer.  The notification
must be received at least 30 days before such addition or employment is intended
to become effective and should include a description of the background and
experience of the individual or individuals to be added or employed.
(d)           The Bank shall not pay executive management bonuses without the
prior written consent of the Regional Director and Director.  The term
“Executive Management” is as defined in the Federal Reserve Board’s Regulation
O.
2.   Within 30 days from the effective date of this ORDER, the Bank’s 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; operating policies; and individual
committee actions.  The Bank’s Board minutes shall document these reviews and
approvals, including the names of any dissenting directors.
3.   (a)           Within 60 days of the effective date of this ORDER, the Bank
shall increase and thereafter maintain Tier 1 capital in such an amount as to
equal or exceed 10 percent of the Bank’s total assets.
 
 

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(b)  Within 60 days from the effective date of this ORDER, the Bank shall
develop and adopt a plan to meet and thereafter maintain the minimum risk-based
capital requirements as described in 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.  The Plan shall be in a form and
manner acceptable to the Regional Director and Director as determined at
subsequent examinations.
(c)  The level of Tier 1 capital to be maintained during the life of this ORDER
pursuant to Subparagraph 3(a) shall be in addition to a fully funded allowance
for loan and lease losses (“ALLL”), the adequacy of which shall be satisfactory
to the Regional Director and the Director as determined at subsequent
examinations and/or visitations.
(d)      For the purpose of this Order, the terms “Tier 1 capital” and “total
assets” shall have the meaning as described to them in Part 325 of the FDIC’s
Rules and Regulations, 12 C.F.R. § 325.2(v) and 325.2(x).
4.             (a)      Within 30 days from the effective date of this ORDER,
the Bank shall maintain the ALLL at an adequate level commensurate with the risk
in the loan portfolio.
(b)  Additionally, within 30 days from the effective date of this ORDER, the
Bank’s Board shall develop or revise, adopt and implement a comprehensive policy
for determining the adequacy of the ALLL.  For the purpose of this
determination, the adequacy of the reserve shall be determined after the
charge-off of all loans or other credit-related items classified "Loss" in the
Joint ROE dated February 9, 2009.  The policy shall provide for a review of the
ALLL at least once each calendar quarter.  Said review should be completed in
order that the findings of the Bank’s Board with respect to the ALLL may be
properly reported in the quarterly Reports of Condition and Income. The review
should focus on the results of the Bank's internal loan review,
 

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loan loss experience, trends of delinquent and non-accrual loans, an estimate of
potential loss exposure of significant credits, concentrations of credit, and
present and prospective economic conditions.  A deficiency in the 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 Bank’s Board meeting at which such review is undertaken shall indicate the
results of the review.  Upon completion of the review, the Bank shall maintain
its ALLL consistent with the ALLL policy established.  Such policy and its
implementation shall be satisfactory to the Regional Director and the Director
as determined at subsequent examinations and/or visitations.
5.             (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 loans classified "Doubtful" in the
ROE dated February 9, 2009 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.
(b)   Within 120 days from the effective date of this ORDER, the Bank shall have
reduced the loans classified “Substandard” and the loans classified as
"Doubtful" in the ROE dated February 9, 2009 that have not previously been
charged off to not more than 50 percent of Tier 1 capital plus the ALLL.
(c)   The requirements of Subparagraphs 5(a) and 5(b) of this ORDER 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:
 
 

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(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/or
WDFI.
(d)   Within 60 days from the effective date of this ORDER, the Bank shall
develop written asset disposition plans for each classified asset identified in
the ROE dated February 9, 2009 that is greater than $500,000.  The plans shall
be reviewed and approved by the Bank’s Board and acceptable to the Regional
Director and Director as determined at subsequent examinations.
6.   (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.  Subparagraph 6(a) of this ORDER shall not prohibit the Bank from
renewing or extending the maturity of any credit in accordance with the
Financial Accounting Standards Board Statement Number 15 ("FASB 15").
(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" without the prior approval of a
majority of the Bank’s Board or the loan committee of the Bank.
(c)   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,
 

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"Substandard" without the prior approval of a majority of the Bank’s Board or
the loan committee of the Bank.
 
(d)   The loan committee or Bank’s Board shall not approve any extension of
credit, or additional credit to a borrower in Paragraphs (b) and (c) above
without first collecting in cash all past due interest.
7.   Within 30 days from the effective date of this ORDER, the Bank shall
implement accurate and realistic models for valuing and pricing its
collateralized debt obligations portfolio and recognizing Other-Than-Temporary
Impairment (“OTTI”) securities as described in the Joint ROE dated February 9,
2009.  The model(s) utilized for quarterly determinations of impairment charges
and investment pricing and securities valuation shall adhere to Generally
Accepted Accounting Principles (“GAAP”) and appropriate practices applied to
such securities.  The analysis and assumptions shall be satisfactory to the
Regional Director and the Director consistent with GAAP, as determined at
subsequent examinations and/or visitations.
8.   Within 60 days of the effective date of this ORDER, the Bank shall develop
and submit to the Regional Director and the Director a written three-year
strategic plan.  Such plan shall include specific goals for the dollar volume of
total loans, total investment securities, and total deposits as of December 31,
2010, December 31, 2011, and December 31, 2012.  For each time frame, the plan
will also specify the anticipated average maturity and average yield on loans
and securities; the average maturity and average cost of deposits; the level of
earning assets as a percentage of total assets; and the ratio of net interest
income to average earning assets.  The plan shall be in a form and manner
acceptable to the Regional Director and the Director as determined at subsequent
examinations and/or visitations.
 
 

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9.   Within 60 days from the effective date of this ORDER, the Bank shall
formulate and implement a written profit plan.  This plan shall be forwarded to
the Regional Director and the Director for review and comment and shall address,
at a minimum, the following:
(a)   goals and strategies for improving and sustaining the earnings of the
Bank, including:
(i)   an identification of the major areas in, and means by which, the Bank’s
Board will seek to improve the Bank's operating performance;
(ii)   realistic and comprehensive budgets;
(iii)   a budget review process to monitor the income and expenses of the Bank
to compare actual figures with budgetary projections; and
(iv)   a description of the operating assumptions that form the basis for, and
adequately support, major projected income and expense components.
(b)   coordination of the Bank's loan, investment, and operating policies, and
budget and profit planning, with the funds management policy.
10.   Within 30 days from the effective date of this ORDER, the Bank shall
eliminate and/or correct all violations of law and contraventions of policy, as
more fully set forth in the ROE dated February 9, 2009.  In addition, the Bank
shall take all necessary steps to ensure future compliance with all applicable
laws and regulations.
11.   Within 30 days from the effective date of this ORDER, the Bank’s Board
shall revise, adopt and fully implement a written liquidity and funds management
policy which includes a contingency plan detailing the actions to be implemented
under various liquidity scenarios.  Such policy shall include specific
provisions to provide for a minimum primary liquidity ratio (net cash,
short-term, and marketable assets divided by net deposits and short-term
 

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liabilities) of at least 15 percent and a plan for achieving and maintaining the
minimum primary liquidity ratio.  The policy and plan for achieving the minimum
primary liquidity ratio shall be in a form and manner acceptable to the Regional
Director and Director of Bank’s as determined at subsequent examinations and/or
visitations.
12.   (a)           Within 10 days of the effective date of this ORDER, the Bank
shall submit to the Regional Director and the Director a written plan for
eliminating its reliance on brokered deposits.  The plan should contain details
as to the current composition of brokered deposits by maturity and explain the
means by which such deposits will be paid or rolled over.  The Regional Director
and the Director shall have the right to reject the Bank's plan.  On the 10th
day of each month, the Bank shall provide a written progress report to the
Regional Director and the Director detailing the level, source, and use of
brokered deposits with specific reference to progress under the Bank's
plan.  For purposes of this ORDER, brokered deposits are defined as described in
section 337.6(a)(2) of the FDIC’s Rules and Regulations to include any deposits
funded by third party agents or nominees for depositors, including deposits
managed by a trustee or custodian when each individual beneficial interest is
entitled to or asserts a right to federal deposit insurance.
(b)           Within 10 days of the effective date of this ORDER, the Bank shall
certify in writing to the Regional Director and the Director that the pricing of
all of the Bank’s deposit products is in compliance with the interest rate
limitations in section 337.6 of the FDIC’s Rules and Regulations.  Such written
certification should accompany data analysis adequate to support Bank’s
conclusion.  Thereafter, the Bank shall make such certification and data
available for the review of the Regional Director and the Director as requested
at subsequent examinations and/or visitations.
 
 

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13.   The Bank shall not pay cash dividends without the prior written consent of
the Regional Director and the Director.
14.   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 detailing the form and manner of any actions taken to secure compliance
with this ORDER and the results thereof.  Such reports shall include a copy of
the Bank's Report of Condition and the Bank's Report of Income.  Such reports
may be discontinued when the corrections required by this ORDER have been
accomplished and the Regional Director and the Director have released the Bank
in writing from making further reports.
15.   Following the effective date of this ORDER, the Bank shall send to its
shareholder(s) or otherwise furnish a description of this ORDER in conjunction
with the Bank's next shareholder communication and also in conjunction with its
notice or proxy statement preceding the Bank's next shareholder meeting.  The
description shall fully describe the ORDER in all material respects.  The
description and any accompanying communication, statement, or notice shall be
sent to the FDIC, Accounting and Securities Section, Washington, D.C. 20429, at
least 15 days prior to dissemination to shareholders.  Any changes requested to
be made by the FDIC shall be made prior to dissemination of the description,
communication, notice, or statement.

 

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       This ORDER will become effective upon its issuance by the FDIC and the
WDFI.  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 and
the WDFI.
Pursuant to delegated authority.
Dated at San Francisco, California, this 30th day of September, 2009.
 

 

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

 

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