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FDIC Enforcement Decisions and Orders

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   [10,029] In the Matter of Wayne County Bank and Trust Company, Fairfield, Illinois, Docket No. FDIC-89-224b (12-4-89).

   [Bank to cease and desist from practices such as operating with inadequate capital; engaging in hazardous lending and lax collection practices; violating of federal and state law; and operating with inadequate asset/liability management policy, with inadequate allowance for loan and lease losses, with management whose policies and practices are detrimental to the institution, with a Board of Directors that did not provide adequate supervision over the direction and management of the Bank; and in such a manner as to produce a low net interest margin resulting in unsatisfactory earnings. (This order was terminated by order of the FDIC dated 2-1-94; see ¶15,801.)

   [.1] Management—Qualifications—Compliance
   [.2] Loan Policy—Minimum Requirements—Review
   [.3] Primary Capital—Increase—Methods
   [.4] Shareholders—Dividends—Approval
   [.5] Loans—Risk Position—Minimum Requirements
   [.6] Violations of Law—Eliminate/Correct—Compliance
   [.7] Assets—Adversely Classified—Reduce
   [.8] Loan Loss Reserve—Adequacy—Review
   [.9] Loans—Extension of Credit-Curtail
   [.10] Asset/Liability Management Policy—Minimum Requirements—Review
   [.11] Budget Plan—Minimum Requirements—Review
   [.12] Board of Directors—Compliance Committee—Written Reports
   [.13] Shareholders—Disclosure—Cease and Desist Order
   [.14] Compliance—Progress Reports—Frequency

In the Matter of

WAYNE COUNTY BANK AND TRUST COMPANY
FAIRFIELD, ILLINOIS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Wayne County Bank and Trust Company, Fairfield, Illinois ("Depository Institution"), 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 regulation alleged to have been committed by the Depository Institution, and of its right to a hearing on the charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), amended by section 902 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L.No.101-73 § 902, 103 Stat. 183, ____ (1989) (to be codified at 12 U.S.C. § 1818(b)), 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"), dated October 12, 1989, whereby, solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices and violations of law and/or regulation, the Depository Institution consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Depository Institution had engaged in unsafe or unsound banking practices and had violated laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT, and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Depository Institution, its institution-affiliated parties, as that term is defined in section 204(f) of the FIRREA, Pub. L. No. 101-73 § 204(f), 103 Stat. 183, _____ (1989) (to be codified at 12 U.S.C. § 1813(u)), and its successors and assigns, cease and desist from the following {{4-30-94 p.C-142}}unsafe or unsound banking practices and violations of laws and regulations:
   A. Operating with an inadequate level of capital protection for the kind and quality of assets held;
   B. Engaging in hazardous lending and lax collection practices, as evidenced by an excessive volume of adversely classified loans and poor credit administration;
   C. Violating sections 215.4(a), 215.4(b), and 215.4(d) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.4(a), 215.4(b) and 215.4(d); violating sections 23A(c) and 23B(a)(1)(B) of the Federal Reserve Act, 12 U.S.C. §§ 371c and 371c-1; and violating the State of Illinois legal lending limit restrictions as set forth in section 32 of the Illinois Banking Act, ILL. REV. STAT., Ch. 17, par. 339;
   D. Operating with an adequate asset/ liability management policy;
   E. Operating with an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans held;
   F. Operating with a management whose policies and practices are detrimental to the Depository Institution and jeopardize the safety of its deposits;
   G. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management of the Depository Institution; and
   H. Operating in such a manner as to produce a low net interest margin, resulting in unsatisfactory earnings.
   IT IS FURTHER ORDERED, that the Depository Institution, its institution-affiliated parties, and any successors and assigns thereof, take affirmative action as follows:

   [.1] 1. (a) Within 90 days from the effective date of this ORDER, the Depository Institution shall have, and thereafter retain, qualified management. Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Depository Institution. Further, during the life of this ORDER, the Depository Institution shall promptly notify the Regional Director of the FDIC's Chicago Regional Office ("Regional Director") and the Commissioner of Banks and Trust Companies of the State of Illinois ("Commissioner") of any changes in any of the Depository Institution's executive officers and shall submit to the Regional Director and Commissioner a written statement of the qualifications of any new executive officer. The notification must include the name and background of any replacement personnel and must be provided prior to the individual assuming the new position. For purposes of this paragraph, "executive officer" shall have the meaning ascribed that term in section 215.2(d) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.2(d).
   (b) The quality of management shall be assessed on its ability to:

       (i) Comply with the requirements of this ORDER;
       (ii) Operate the Depository Institution in a safe and sound manner;
       (iii) Comply with applicable laws and regulations; and
       (iv) Restore all aspects of the Depository Institution to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.
   (c) Within 90 days from the effective date of this ORDER, the Depository Institution shall have, and thereafter retain, a qualified chief lending officer with an appropriate level of lending, collection and loan supervision experience for the type and quality of the Depository Institution's loans. Such person shall be provided written authority by the Depository Institution's board of directors that shall include, at a minimum, the responsibility for maintaining prudent lending policies and practices.

   [.2] 2. (a) Within 60 days from the effective date of this ORDER, and annually thereafter, the board of directors of the Depository Institution shall review the Depository Institution's loan policy and practices for adequacy and, based upon this review, shall make all appropriate revisions to the policy necessary to strengthen lending procedures and abate additional loan deterioration. The minutes of the board of directors meetings at which such reviews are undertaken shall indicate the findings of the reviews and a description of any revisions made.
   (b) The initial revision to the Depository Institution's loan policy required by this paragraph, at a minimum shall include the following:

       (i) Provisions requiring that all extensions of credit originated or renewed above $5,000 be supported by current and complete financial data and, where applicable, complete collateral documentation; have a clearly defined purpose:
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    and have a predetermined repayment source and schedule.
       (ii) Provisions requiring loan committee review and monitoring of the status of repayment and collection of overdue and maturing loans, as well as those loans which were classified "Substandard" in the FDIC Report of Examination as of June 2, 1989, or in any future examination conducted by the FDIC or State authority.
       (iii) Provisions requiring the establishment and maintenance of a loan grading system and internal loan watch list.
       (iv) Provisions requiring a written plan to lessen the Depository Institution's risk position in each line of credit identified as a problem credit on the Depository Institution's internal loan watch list.
       (v) Provisions, consistent with FDIC 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 and on other problem loans.
       (vi) Provisions which address acceptable qualifications for real estate appraisers as set out in BL-40-87 dated December 14, 1987 (Guidelines for Real Estate Appraisal Policies and Review Procedures);
   (c) Within 60 days from the effective date of this ORDER, the Depository Institution shall implement a written, detailed internal audit program designed to monitor and ensure compliance with the Depository Institution's loan policy and procedures.

   [.3] 3. (a) Within 30 days from the effective date of this ORDER, the Depository Institution shall submit to the Regional Director and Commissioner a plan to raise the Depository Institution's level of primary capital as a percentage of its total assets to at least 7.5 percent by December 31, 1989.
   (b) Within 30 days from each June 30 and December 31 following the effective date of this ORDER, the Depository Institution's board of directors shall determine the Depository Institution's level of primary capital as a percentage of its total assets for the quarter preceding the respective June 30 and December 31 dates. If that percentage is less than 7.5 percent, the Depository Institution shall, within 90 days from the date of that determination, increase the capital/asset relationship to not less than 7.5 percent as of the end of that preceding semiannual period. For the purpose of this ORDER, the terms "primary capital" and "total assets" utilized in computing the relationship shall be defined and calculated in accordance with the provisions of Part 325 of FDIC Rules and Regulations, 12 C.F.R. Part 325.
   (c) Any increase in primary capital necessary to meet the requirements of this paragraph may be accomplished by the following:

       (i) The sale of equity securities allowed as primary capital under 12 C.F.R. Part 325; or
       (ii) The collection in cash of assets previously charged off; or
       (iii) The direct contribution of cash by the directors and/or the shareholders of the Depository Institution; or
       (iv) Any other means acceptable to the Regional Director and Commissioner, or
       (v) Any combination of the above means.
   (d) If all or part of the increase in primary capital required by this paragraph is to be accomplished by the sale of new securities, the board of directors of the Depository Institution shall forthwith 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 said plan. Should the implementation of the plan involve a public distribution of the Depository Institution's securities, including a distribution limited only to the Depository Institution's existing shareholders, the Depository Institution shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Depository Institution 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 materials used in the sale of the securities shall be submitted to the FDIC at Washington, D.C., for its review. Any changes requested to be made in the materi- {{4-1-90 p.C-144}}als by the FDIC shall be made prior to their dissemination.
   (e) In complying with the provisions of paragraph 3(d) of this ORDER, the Depository Institution shall provide to any subscriber and/or purchaser of the Depository Institution's securities 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 Depository Institution securities. The written notice required by this paragraph shall be furnished within 10 calendar days of the date any material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of the Depository Institution's original offering materials.
   (f) The formal capital ratio analysis required by this paragraph shall not negate the responsibility of the Depository Institution and its board of directors for maintaining throughout the year an adequate level of capital protection for the kind, quality and degree of market depreciation of assets held by the Depository Institution.

   [.4] 4. Upon the effective date of this ORDER, the Depository Institution shall pay no cash dividends without the prior written consent of the Regional Director and Commissioner.

   [.5] 5. Within 60 days from the effective date of this ORDER, the Depository Institution shall formulate, adopt, and submit to the Regional Director and Commissioner for review and comment, a written plan of action to lessen the Depository Institution's risk position in each asset in excess of $50,000 which is classified "Substandard" in the FDIC Report of Examination as of June 2, 1989. Such plan shall include, but not be limited to, the following:
   (a) Dollar levels to which the Depository Institution will reduce each asset within 6 and 12 months from the effective date of this ORDER; and
   (b) Provisions for the submission of monthly written progress reports to the Depository Institution's board of directors for review and notation in minutes of the meetings of the board of directors.

   [.6] 6. Within 90 days from the effective date of this ORDER, the Depository Institution shall eliminate and/or correct all violations of law and/or regulation described on pages 6-a, 6-a-1, and 6-a-2 of the FDIC Report of Examination as of June 2, 1989. In addition, the Depository Institution shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.7] 7. Within 30 days from the effective date of this ORDER, the Depository Institution shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" in the FDIC Report of Examination as of June 2, 1989. Reduction of these assets with proceeds of other loans made by the Depository Institution is not considered collection for the purpose of this paragraph.

   [.8] 8. (a) Within 30 days from the effective date of this ORDER, the Depository Institution shall replenish its loan valuation reserve by an expense entry in an amount equal to those loans required to be charged off by this ORDER.
   (b) Within 30 days from the effective date of this ORDER, the Depository Institution shall make a provision to the loan valuation reserve which, after careful review and consideration by the board of directors, reflects the potential for further losses in the "Substandard" loan classifications and all other loans in its portfolio. The results of the board of directors' review and consideration shall be recorded in the minutes of the board meeting at which the matter is considered.
   (c) Within 30 days from the effective date of this ORDER, Reports of Condition and Reports of Income required by the FDIC and filed by the Depository Institution subsequent to June 2, 1989, shall be amended and refiled if they do not reflect a provision for loan losses and loan valuation reserve which are adequate considering the condition of the Depository Institution's loan portfolio and which, at a minimum, incorporate the adjustments required by this paragraph.
   (d) Orior to the submission or publication of all Reports of Condition and Reports of Income required by the FDIC after the effective date of this ORDER, the board of directors of the Depository Institution shall review the adequacy of the Depository Institution's loan valuation reserve and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of increase in the re- {{5-31-92 p.C-145}}serve recommended, if any, and the basis for determination of the amount of reserve provided.

   [.9] 9. (a) Following the effective date of this ORDER, the Depository Institution shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who is already obligated in any manner to the Depository Institution on any extensions of credit (including any portion thereof) that has been charged off the books of the Depository Institution so long as such credit remains uncollected.
   (b) Following the effective date of this ORDER, the Depository Institution shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Substandard" and is uncollected unless the Depository Institution's board of directors has adopted a detailed written statement giving the reasons why extending such credit is in the best interests of the Depository Institution. A copy of the statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.

   [.10] 10. (a) Within 60 days from the effective date of this ORDER, the board of directors of the Depository Institution shall amend its written asset/liability management policy. The policy shall address, at a minimum the following:

       (i) Procedures for measuring the Depository Institution's exposure to interest rate risk. Such measurements should include, but not be limited to, the ratio of the net position of rate sensitive assets to rate sensitive liabilities divided by total assets (GAP) at various time frames, including a twelve month time horizon:
       (ii) Desired parameters for the degree of interest rate risk found in the structure of the Depository Institution's asset and liabilities; and
       (iii) Funding strategies and objectives to bring the Depository Institution in line with established parameters.
   (b) The amended written policy required by this paragraph shall be submitted to the Regional Director and Commissioner for review and comment. Within 30 days of the receipt of any comment from the Regional Director or Commissioner, and after revising the policy in accordance with any changes recommended by the Regional Director or Commissioner, the board of directors shall approve and implement the policy. The approvals shall be recorded in the minutes of the meeting of the board of directors.

   [.11] 11. (a) Within 60 days from the effective date of this ORDER, the Depository Institution shall formulate and fully implement a written plan and a realistic, comprehensive budget for all categories of income and expense. The plan required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to improve the Depository Institution's overall earnings, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components.
   (b) The plan and budget required by this paragraph, upon completion, shall be submitted to the Regional Director and Commissioner for review and opportunity for comment.
   (c) Prior to the end of each calendar quarter, the Depository Institution's board of directors shall evaluate the Depository Institution's actual performance in relation to the plan and budget required by this paragraph and record the results of the evaluation, and any actions taken by the Depository Institution, in the minutes of the board of directors meeting at which such evaluation is undertaken.

   [.12] 12. Within 30 days from the effective date of this ORDER, the Depository Institution shall establish a compliance committee comprised of at least three directors. No committee member may be an active officer of the Depository Institution. The committee shall monitor compliance with this ORDER, and, on a monthly basis, shall submit to the board of directors a written report detailing the Depository Institution's compliance with this ORDER and with its written loan, investment, and asset/liability management policies. The monthly compliance report shall be included in the minutes of the meeting of the Depository Institution's board of directors.

   [.13] 13. Following the effective date of this ORDER, the Depository Institution shall send to its shareholders or otherwise furnish a description of this ORDER: (1) in con- {{5-31-92 p.C-146}}junction with the Depository Institution's next shareholder communication; and (2) in conjunction with its notice or proxy statement preceding the Depository Institution'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 at Washington, D.C., 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.

   [.14] 14. On the last day of the second month following the date of issuance of this ORDER, and every third month thereafter, the Depository Institution shall furnish written progress reports signed by each member of the Depository Institution's board of directors to the Regional Director and Commissioner detailing the form and manner of any actions taken to secure compliance with the ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and Commissioner have in writing released the Depository Institution from making further reports.
   The effective date of this ORDER shall be 10 days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Depository Institution, 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 provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated: December 4, 1989.
   Pursuant to delegated authority.

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