ex101.htm


    
       

      
        	
                Exhibit
      10.1 

              


      

       

    

    FEDERAL
DEPOSIT INSURANCE CORPORATION

    


    WASHINGTON,
D.C.

    


     

    WASHINGTON
DEPARTMENT OF FINANCIAL INSTITUTIONS

    


    OLYMPIA,
WASHINGTON

     

    
    

     

    
      	 	 	 
	
              IN THE
      MATTER OF

               

              HORIZON BANK 

              BELLINGHAM, WASHINGTON  

               

              (INSURED STATE NONMEMBER BANK)

            	
              )

              )

              )

              )

              )

              )

              )

              )

              )

              ) 

            	
               ORDER
      TO

              CEASE AND DESIST

               

              Docket
      FDIC-08-404b

            
	 	 	 


    

     

    


    Horizon Bank, Bellingham, Washington
("Bank"), having been advised of its right to a NOTICE OF CHARGES AND OF HEARING
detailing the unsafe or unsound banking practices 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 Revised Code of Washington, Anno. § 30.04.450, 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 February 26, 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.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    -2-

     

     

         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.  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 (“Joint ROE”) dated September
15, 2008:

    (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;

    (f)        
operating
in such a manner as to produce low earnings; and

    (g)       
operating
with inadequate provisions for liquidity.

     

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

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    -3-

     

     

    1.          
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.

     

    2.            
(a)        
Within 270 days from the effective date of this ORDER, the Bank shall increase
Tier 1 capital to no less than ten percent (10%) of the Bank’s total
assets.

    (b)         
The level
of Tier 1 capital to be maintained during the life of this ORDER pursuant to
Subparagraph 2(a) 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 of the FDIC’s San Francisco Regional Office
(“Regional Director”) and the WDFI Director (“Director”)  as
determined at subsequent examinations and/or visitations.

    (c)          
Any
increase in Tier 1 capital necessary to meet the requirements of Paragraph 2 of
this ORDER may be accomplished by the following:

    (i)       
the sale
of common stock; or

    (ii)      
the sale
of noncumulative perpetual preferred stock; or

    (iii)     
the
direct contribution of cash by the Bank’s Board, shareholders, and/or parent
holding company; or

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
       

      
        	
                -4- 

              


      

       

    

     

    (iv)      
any other
means acceptable to the Regional Director and the Director; or

    (v)       
any
combination of the above means.

    Any
increase in Tier 1 capital necessary to meet the requirements of Paragraph 2 of
this ORDER may not be accomplished through a deduction from the Bank's allowance
for loan and lease losses.

    (d)           
If all or
part of the increase in Tier 1 capital required by Paragraph 2 of this ORDER is
accomplished by the sale of new securities, the Bank’s Board shall forthwith
take all necessary steps to 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 15 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 and Disclosure Unit,
Washington, D.C. 20429, for review.  Any changes requested to be made
in the plan or materials by the FDIC shall be made prior to their
dissemination.  If the increase in Tier 1 capital is provided by the
sale of noncumulative perpetual preferred stock, then all terms and conditions
of the issue, including but not limited to those terms and conditions relative
to interest rate and convertibility factor, shall be presented to the Regional
Director and the Director for prior approval.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
       

      
        	
                -5- 

              


      

       

    

    (e)           
In
complying with the provisions of Paragraph 2 of this ORDER, 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.

    (f)           
For the
purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall
have, the meanings ascribed to them in Part 325 of the FDIC’s Rules and
Regulations, 12 C.F.R. §§ 325.2(v) and 325.2(x).

     

    3.            
Within 90
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 allowance for loan and lease losses.  For the purpose of this
determination, the adequacy of the reserve shall be determined after the
charge-off of all loans or other items classified "Loss."  The policy
shall provide for a review of the allowance at least once each calendar
quarter.  Said review should be completed prior to closing the Bank’s
books at the end of each quarter, in order that the findings of the Bank’s Board
with respect to the loan and lease loss allowance 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, 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 allowance shall
be 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      
         

        
          	
                  -6- 

                


        

         

      

       

      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
increase and maintain its allowance for loan and lease losses consistent with
the allowance for loan and lease loss policy established.  Such policy
and its implementation shall be satisfactory to the Regional Director and the
Director as determined at subsequent examinations.

    

     

    4.            (a)           Within
90 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 Joint ROE dated September 15, 2008 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 4 unless made to a newly qualified
entity that is separate and distinct from the original borrower.

    (b)         
Within
270 days from the effective date of this ORDER, the Bank shall have eliminated
all remaining Doubtful assets.

    (c)          
Within
270 days from the effective date of this ORDER, the Bank shall have reduced the
assets classified "Substandard" in the Joint ROE dated September 15, 2008, that
have not previously been charged off to not more than seventy-five percent (75%)
of the Bank’s capital plus its allowance for loan and lease losses as of
September 30, 2008.

    (d)         
Within 90
days from the effective date of this ORDER, the Bank shall develop written asset
disposition plans for each classified asset greater than $50,000.  The
plans shall be reviewed and approved by the Bank’s Board and acceptable to the
Regional Director and the Director as determined at subsequent
examinations.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
    

     

    
      	
              -7- 

            


    

     

    (e)        
Within 90
days from the effective date of this ORDER, the Bank shall adopt and implement a
written plan for the reduction and collection of delinquent
loans.  The plan shall be acceptable to the Regional Director and the
Director as determined at subsequent examinations.

    (f)          
The Bank
may achieve compliance with the requirements of this paragraph 4 through the
participation in any program providing for the disposition of problem assets
and/or injection of additional capital, including a program sponsored by the
United States Treasury or other government agency.

     

    5.            
(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 5(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 in excess of $50,000 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 in excess of $50,000 that
has been classified, in 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

      
         

        
          	
                  -8- 

                


        

         

      

      whole or
part, "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.

     

    6.           
Within 90
days from the effective date of this ORDER, the Bank shall develop a written
plan, approved by its Board and acceptable to the Regional Director and the
Director 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 “Construction and Land Development” Concentrations, as more fully set
forth in the Joint ROE dated September 15, 2008.  No new loans or
other extensions of credit shall be granted to or for the benefit of, any
borrower in the “Construction and Land Development” Concentrations with the
exception of loans or extensions of credit to individuals which are for first
lien single family residential real estate financing or for household, family,
or other consumer expenditures and which have received the prior written
approval of the Bank’s Board as reflected in its recorded minutes and are
otherwise in conformance with all laws and regulations.

     

    7.           
Within 90
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,
2009, December 31, 2010, and December 31, 2011.  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 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

      
         

        
          	
                  -9- 

                


        

         

      

      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.

    

     

    8.           
Within 90
days from the effective date of this ORDER, the Bank shall develop or revise,
adopt, and implement a written liquidity and funds management policy including,
but not limited to, addressing and correcting deficiencies noted in the Joint
ROE dated September 15, 2008.  Such policy and its implementation
shall be in a form and manner acceptable to the Regional Director and the
Director as determined at subsequent examinations and/or
visitations.

     

    9.           
The Bank
shall not pay cash dividends without the prior written consent of the Regional
Director and the Director.

     

    10.          Within 30
days of the end of the first calendar 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.

     

    11.           
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 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

      
         

        
          	
                  -10- 

                


        

         

      

      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.

    

    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 _____ day of _______________, 2009.

    


    


    


     

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