ex10-1.htm


    
      

      

    


    FEDERAL
DEPOSIT INSURANCE CORPORATION

    


    WASHINGTON,
D.C.

    


    WASHINGTON
DEPARTMENT OF FINANCIAL INSTITUTIONS

    


    OLYMPIA,
WASHINGTON

    


     

    
      
        	 
      	 
      	 
      
	
                In
      the Matter of

                 

                FRONTIER
      BANK

                EVERETT,
      WASHINGTON

                 

                (INSURED
      STATE NONMEMBER BANK)

              	
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                ORDER
      TO

                CEASE AND
      DESIST

                Docket
      FDIC-09-080b

              
	 
      	 
      	 
      


      

       

          Frontier
Bank, Everett, 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 § 30.04.450 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 (“DFI”), dated
March 18, 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
DFI.

    


    
      
         


      

      
         


        
          

        

      

      
         


        
           

          


        

      

    


    The FDIC and the DFI 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 DFI,
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 DFI Report of Examination (“ROE”) dated July 21,
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) engaging
in unsatisfactory lending and collection practices;

     

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

     

    (h) 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:


    
      
         


      

      
         


        
          

        

      

      
         


        
          


          


        

      

    


    


    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 a chief executive officer with proven ability in managing a bank of
comparable size, and experience in upgrading a low quality loan portfolio,
improving earnings, and other matters needing particular
attention.  Management shall also include a senior lending officer
with significant appropriate 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 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.

     

    (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 DFI Director
of the Divisions of Banks ("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.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    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 Board shall develop a
capital plan that shall be submitted to the Regional Director and the Director
for review and comment.  Within 10 days of receipt of all such
comments from the Regional Director and the Director, and after consideration of
all such comments, the Bank shall approve the revised plan, which approval shall
be recorded in the minutes of the meetings of the Board.  Thereafter,
the Bank shall implement and fully comply with the capital plan.  The
Board shall review and update the Bank's capital program on an annual basis, or
more frequently if necessary.  Copies of the reviews and updates shall
be submitted to the Regional Director and the Director.  At a minimum,
the program shall include:

     

    (i) specific
plans to achieve the capital levels required under the plan and this
ORDER;

     

    (ii) projections
for asset growth and capital requirements, and such projections shall be based
upon a detailed analysis of the Bank’s current and projected assets,
liabilities, earnings, fixed assets, and off-balance sheet activities, each of
which shall be consistent with the Bank’s strategic business plan;

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (iii) projections
for the amount and timing of the capital necessary to meet the Bank's current
and future needs;

     

    (iv) the
primary source(s) from which the Bank will strengthen its capital to meet the
Bank’s needs; and

     

    (v) contingency
plans that identify alternative sources of capital should the primary source(s)
under (iv) above not be available.

     

    4.    (a)
Within 120 days from the effective date of this ORDER, the Bank shall increase
its Tier 1 capital in such an amount as to equal or exceed 10 percent of the
Bank’s total assets, and shall thereafter maintain Tier 1 capital in such an
amount as to equal or exceed 10 percent 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 4(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 and the Director as determined at subsequent examination and/or
visitations.

     

    (c) 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).

     

    5.
Within 60
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 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 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 and/or visitations.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    6.    (a)
Within 60 days from the effective date of this ORDER, the Bank shall formulate a
written plan to reduce the Bank’s risk exposure in each asset adversely
classified “Substandard” or “Doubtful” in the ROE.  For purposes of
this provision, “reduce” means to collect, charge off, or improve the quality of
an asset so as to warrant its removal from adverse classification by the
Regional Director and the Director.  In developing the plan mandated
by this paragraph, the Bank shall, at a minimum, and with respect to each
adversely classified loan or lease, review, analyze, and document the financial
position of the borrower, including source of repayment, repayment ability, and
alternative repayment sources, as well as the value and accessibility of any
pledged or assigned collateral, and any possible actions to improve the Bank’s
collateral position.

     

    (b) In
addition, the plan mandated by this provision shall also include, but not be
limited to, the following:

     

    (i) A
schedule for reducing the outstanding dollar amount of each adversely classified
asset, including timeframes for achieving the reduced dollar amounts (at a
minimum, the schedule for each adversely classified asset must show its expected
dollar balance on a quarterly basis);

     

    (ii) Specific
action plans intended to reduce the Bank’s risk exposure in each classified
asset;

     

    (iii) A
schedule showing, on a quarterly basis, the expected consolidated balance of all
adversely classified assets, and the ratio of the consolidated balance to the
Bank’s projected Tier 1 capital plus the allowance for loan and lease
losses;

     

    (iv) A
provision for the Bank’s submission of monthly written progress reports to its
board of directors; and

     

    (v) A
provision mandating board review of the progress reports, with a notation of the
review recorded in the minutes of the meeting of the board of
directors.

     

    (c) The plan
mandated by this provision shall further require a reduction in the aggregate
balance of assets classified “Substandard” and “Doubtful” in the
ROE.

     

    (d) The
requirements of this paragraph do not represent standards for future operations
of the Bank.  Following compliance with the above reduction schedule,
the Bank shall continue to reduce the total volume of adversely classified
assets.  The plan may include a provision for increasing Tier 1
capital when necessary to achieve the prescribed ratio.

     

    (e) The Bank
shall, immediately upon completion, submit the plan to the Regional Director and
the Director for review and comment.  Within 30 days from receipt of
any comment from the Regional Director and the Director, and after due
consideration of any recommended changes, the Bank shall approve the plan, which
approval shall be recorded in the minutes of the meeting of the board of
directors.  Thereafter, the Bank shall implement and fully comply with
the plan.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    7.    (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 7(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, "Substandard" without the prior approval of a majority of the
Bank’s Board or the loan committee of the Bank.

     

    (d) The
Bank’s Board and/or loan committee shall not approve extending the maturity of
any credit, or additional credit to a borrower in paragraphs (b) and (c) above
without first collecting in cash all past due interest.

     

    8.    (a)
Within 60 days from the effective date of this ORDER, the Bank shall revise,
adopt, and implement written lending and collection policies to provide
effective guidance and control over the Bank's lending function, which policies
shall include specific guidelines for placing loans on a non-accrual
basis.  In addition, the Bank shall obtain adequate and current
documentation for all loans in the Bank's loan portfolio.  Such
policies and their implementation shall be in a form and manner acceptable to
the Regional Director and the Director as determined at subsequent examinations
and/or visitations.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (b) The
initial revisions to the Bank's loan policy and practices, required by this
paragraph, at a minimum, shall include the following:

     

    (i) provisions,
consistent with FDIC’s instructions for the preparation of Reports of Condition
and Income, under which the accrual of interest income is discontinued and
previously accrued interest is reversed on delinquent loans;

     

    (ii) provisions
which prohibit the capitalization of interest or loan related expense unless the
Bank’s Board supports in writing and records in the minutes of the corresponding
Bank’s Board meeting why an exception thereto is in the best interests of the
Bank;

     

    (iii) provisions
which require complete loans documentation, realistic repayment terms, and
current credit information adequate to support the outstanding indebtedness of
the borrower.  Such documentation shall include current financial
information, profit and loss statements or copies of tax returns and cash flow
projections;

     

    (iv) provisions
which incorporate limitations on the amount that can be loaned in relation to
established collateral values;

     

    (v) provisions
which specify the circumstances and conditions under which real estate
appraisals must be conducted by an independent third party;

     

    (vi) provisions
which establish standards for unsecured credit;

     

    (vii) provisions
which establish officer lending limits;

     

    (viii) provisions
that require extensions of credit to any of the Bank's executive officers,
directors, or principal shareholders, or to any related interest of such
persons, to be approved in advance by a majority of the entire Bank’s Board in
accordance with section 215.4(b) of Regulation O of the Board of Governors of
the Federal Reserve System, 12 C.F.R. § 215.4(b);

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (ix) provisions
which prohibit the issuance of standby letters of credit unless the letters of
credit are fully secured by readily marketable collateral and/or are supported
by current and complete financial information;

    (x) provisions
that directors first determine that the lending staff has the expertise
necessary to properly supervise construction loans and that adequate procedures
are in place to monitor any construction involved before funds are
disbursed;

     

    (xi) provisions
which prohibit concentrations of credit in excess of 25 percent of the Bank's
total equity capital and reserves to any borrower and that borrower's related
interests;

     

    (xii) provisions
which require the preparation of a loan "watch list" which shall include
relevant information on all loans which are classified "Substandard" and
"Doubtful" in the ROE dated July 21, 2008, or by the FDIC or DFI in subsequent
Reports of Examination and all other loans which warrant individual review and
consideration by the Bank’s Board as determined by the loan committee or active
management.  The loan "watch list" shall be presented to the Bank’s
Board for review at least monthly with such review noted in the minutes;
and

     

    (xiii) the
Bank’s Board shall adopt procedures whereby officer compliance with the revised
loan policy is monitored and responsibility for exceptions thereto
assigned.  The procedures adopted shall be reflected in minutes of a
Bank’s Board meeting at which all members are present and the vote of each is
noted.

     

    9.    (a)
Within 30 days from the effective date of this ORDER, the Bank shall revise its
Concentration Policy to limit concentrations for Commercial Real Estate (“CRE”)
and Acquisition, Development, and Construction (“ADC”) loans in order to comply
with the following:  (i) Appendix A of Part 365 of the FDIC’s Rules
and Regulations, 12 C.F.R. Part 365, Appendix A; (ii) Financial Institution
Letter (FIL)-104-2006, Commercial Real Lending Joint Guidance, dated December
12, 2006; and (iii) the FDIC Order Granting Deposit Insurance to the Bank, dated
April 27, 2006.   The Bank’s Concentrations Policy and its
implementation shall be acceptable to the Regional Director and Director of
Banks as determined at subsequent examinations and/or visitations.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    (b) Within 30 days from the effective
date of this ORDER, the Bank shall develop a written plan for systematically
reducing the amount of CRE and ADC loans in compliance with the revised
Concentration Policy required by subparagraph 9(a) of this ORDER.  The
Bank shall not make any new CRE or ADC loans unless:  (i) the loans
are in compliance with the written plan required by this subparagraph; (ii) the
loans are in compliance with the provisions of subparagraph 7(d) of this ORDER;
and (iii) the loans are approved by the Board.  The plan and its
implementation shall be acceptable to the Regional Director and Director of
Banks as determined at subsequent examinations and/or visitations

     

    10.
Within 60
days from the effective date of this ORDER, the Bank shall develop and adopt a
plan to control overhead and other expenses and restore the Bank's
profitability.  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.

     

    11.
Within 30
days from the effective date of this ORDER, the Bank shall develop or revise,
adopt, and implement a written liquidity and funds management
policy.  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.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    12.
Within 30
days from the effective date of this ORDER, the Bank shall submit to the
Regional Director and the Director a liquidity and funds management plan to
reduce the Bank’s reliance on non-core funding sources, including brokered
deposits and borrowings, and reduce the Bank’s Non Core Funding Dependency
ratio.  The plan shall be acceptable to the Regional Director and the
Director as determined at subsequent examinations and/or
visitations.

     

    13.
The Bank
shall not pay cash dividends without the prior written consent of the Regional
Director and the Director.  In addition, the Bank shall limit the
payment of any management, consulting or other fees or funds of any nature,
directly or indirectly, to or for the benefit of the Bank’s holding company on
behalf of, or for the benefit of the Bank, to those fees that have been
authorized in writing by the Regional Director and the Director.

     

    14.
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.

     

    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.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    This ORDER will become effective upon
its issuance by the FDIC and the DFI.  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 DFI.

     

    Pursuant to delegated
authority.

     

    Dated at San Francisco, California,
this 20 day of March, 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