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FDIC Enforcement Decisions and Orders

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{{11-30-92 p.C-269}}
   [10,053] In the Matter of The Citizens Bank of Sparta, Sparta, Missouri, Docket No. FDIC-90-30b (3-6-90).

   Bank to cease and desist from practices such as operating with an excessive volume of adversely classified assets; engaging in hazardous lending and lax collection practices, with inadequate equity capital and allowance for loan and lease losses for the kind and quality of assets held, with management whose policies and practices are detrimental to the Bank or engaging in management policies and practices that are detrimental to the Bank, with deficient or inadequate loan documentation; engaging in practices that produce inadequate operating income and excessive loan losses; failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices; and operating with deficient and inadequate internal routines and controls. (This order was terminated by order of the FDIC dated 9-3-92; see15,518.)

   [.1] Management—Qualifications—Compliance
   [.2] Assets—Adversely Classified—Reduce
   [.3] Equity Capital—Increase—Methods
   [.4] Loan Loss Reserve—Adequacy—Review
   [.5] Loan Policy—Minimum Requirements—Review
   [.6] Loans—Extension of Credit—Curtail
   [.7] Loans—Interest Accrual—Curtail—Exception
   [.8] Loan Policy—Review
   [.9] Profit Plan—Minimum Requirements—Review
   [.10] Shareholders—Dividends—Approval
   [.11] Shareholders—Disclosure—Cease and Desist Order
   [.12] Technical Exceptions—Special Mention Loans—Correct
   [.13] Compliance—Progress Reports—Frequency

In the Matter of

THE CITIZENS BANK OF SPARTA
SPARTA, MISSOURI
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   The Citizens Bank of Sparta, Sparta, Missouri, ("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 such alleged charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 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 February 27, 1990, whereby solely for the purpose of this proceeding and without admitting or denying any unsafe or unsound banking practices, the Bank 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 Bank had engaged in unsafe or unsound banking practices. The FDIC, 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 {{11-30-92 p.C-270}}U.S.C. § 1813(u), and its successors and assigns cease and desist from the following unsafe and unsound banking practices:
   A. operating with an excessive volume of adversely classified assets;
   B. engaging in hazardous lending and lax collection practices, including maintaining an excessive volume of adversely classified loans;
   C. operating with inadequate equity capital and allowance for loan and lease losses for the kind and quality of assets held;
   D. operating with management whose policies and practices are detrimental to the Bank or engaging in management policies and practices which are detrimental to the Bank;
   E. operating with deficient or inadequate loan documentation, including but not limited to current financial statements, insurance coverage, title searches or legal opinions, and cash flow and/or operating information;
   F. engaging in practices which produce inadequate operating income and excessive loan losses;
   G. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices; and
   H. operating with deficient and inadequate internal routines and controls.
   IT IS FURTHER ORDERED, that the Bank, its Institution-Affiliated Parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. (a) The Bank shall have and retain qualified management. Such management shall include a qualified chief executive officer who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining the policies of the Bank. The chief executive officer shall have an appropriate level of experience to perform the duties assigned to that individual by the Bank's board of directors. The Bank shall promptly notify the Regional Director of the FDIC's Kansas City Regional Office ("Regional Director") of the identity of said chief executive officer. Prior to the addition of any individual to the board of directors or the employment of any individual as a senior executive officer, the Bank shall comply with the requirements of section 32 of the Act, 12 U.S.C. § 1831(i), and section 303.14 of the FDIC's Rules and Regulations, 54 Fed. Reg. 53040 and 53043 (to be codified at 12 C.F.R. § 303.14).
   (b) The assessment of whether the Bank has "qualified management" shall be based upon management's conduct, both individual and joint, with respect to the Bank in: (A) complying with the requirements of this ORDER; (B) complying with applicable laws and regulations; and (C) not engaging in any unsafe or unsound banking practice which has an adverse effect on the Bank's asset quality, capital adequacy, earnings, or liquidity.

   [.2] 2. No more than 10 days from the effective date of this ORDER, the Bank; (1) shall eliminate from its books, by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss" as of October 20, 1989; and (2) shall either (A) eliminate from its books by charge-off collection, or other proper entries, or (B) if the asset is an extension of credit or lease, increase its allowance for loan and lease losses by an amount equal to, 50 percent of those assets or portions of assets classified "Doubtful" as of October 20, 1989, which have not been previously collected, charged off, or otherwise eliminated by other proper entries. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph.

   [.3] 3. (a) No more than 90 days from the effective date of this ORDER, the Bank shall increase its equity capital by not less than $150,000. Such increase in equity capital may be accomplished by:

       (i) the sale of new offerings of common stock or perpetual preferred stock;
       (ii) the sale of outstanding shares by the Bank's shareholders to any investor who has the financial capability to make the additions to the Bank's equity capital required by paragraph 3(a);
       (iii) the direct contribution of cash by the shareholders and/or directors of the Bank;
       (iv) the collection of all or part of assets classified "Loss" or "Doubtful" as of October 20, 1989, without loss or liability to the Bank, provided any such collection on a partially charged off asset shall first be applied to that portion of the asset which was not charged off pur- {{4-1-90 p.C-271}}suant to paragraph 2 of this ORDER. Collections on loans or leases classified "Loss" or "Doubtful" shall be credited to the Bank's allowance for loan and lease losses ("allowance") and, if the board of directors' review of the adequacy of the allowance required by paragraph 4 of this ORDER indicates that such allowance has a balance in excess of that required for adequacy, any such excess may thereafter be transferred to equity capital through a negative provision for loan and lease losses;
       (v) the collection in cash of assets previously charged off;
       (vi) any combination of the above means; or
       (vii) any other means acceptable to the Regional Director.
   (b) If all or part of the increase in total equity capital required under paragraph 3(a) of this ORDER involves an offering, other than an offering deemed not to be a public securities offering pursuant to 17 C.F.R. §230.506 or as hereafter amended, of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the sale of the securities, 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, Registration and Disclosure Unit, Washington, D.C. 20429, for review. Any changes requested in the materials by the FDIC shall be made prior to their dissemination.
   (c) In complying with the provisions of paragraph 3(b) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank stock, written notice of any planned or existing development or other change which is 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 3(c) shall be furnished within 10 days from the date such material development or change was planned or occurred, whichever is earlier, to every purchaser and/or subscriber of Bank stock who received or was tendered the information contained in the Bank's original offering materials.
   (d) (i) No more than 90 days from the effective date of this ORDER, the Bank shall have equity capital, exclusive of the allowance for loan and lease losses, at or in excess of 7 percent of the Bank's average total assets ("equity capital ratio") and shall thereafter maintain its equity capital ratio at or in excess of such level as calculated herein while this ORDER is in effect.
       (ii) For the purposes of calculating the equity capital ratio required by paragraph 3(d)(i) of this ORDER: (A) The Bank's average total assets shall be the quarterly average of total assets reported in the Bank's Report of Condition for the quarter ending June 30 or December 31, whichever nearest precedes the date of calculation; and (B) The terms "equity capital", "allowance for loan and lease losses" and "total assets" shall have the same meaning as those terms have in the prevailing Instructions for Preparation of Reports of Condition. Subsequent to the effective date of this ORDER, the equity capital ratio shall be computed as of June 30 and December 31, as appropriate.
   (e) If, during the period this ORDER is in effect, the equity capital ratio, exclusive of the allowance for loan and lease losses, declines below 7 percent, the Bank, within 30 days after the date on which the said ratio so declined, shall develop and implement a written plan to increase such ratio up to or in excess of 7 percent. No more than 60 days after the implementation of the written plan, the Bank's equity capital ratio, exclusive of the allowance for the loan lease losses, shall equal or exceed 7 percent and the Bank shall thereafter maintain its equity capital ratio at or in excess of such level as calculated herein while this ORDER is in effect.
   (f) The Bank's board of directors shall maintain in its minutes a written record of all actions taken by the Bank to comply with the capital requirements of paragraphs 3(a) through 3(e) of this ORDER, including, at a minimum, any action to increase its equity capital by each of the methods specified in paragraphs 3(a)(i) through 3(a)(vii) of this ORDER.
{{4-1-90 p.C-272}}

   [.4] 4. (a) The Bank shall maintain an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income ("Instructions").
   (b) Reports of Condition and Income required to be submitted by the Bank as of each Report date, as that term is used in the Instructions, between and including October 20, 1989, and the effective date of this ORDER, shall, at a minimum, reflect an allowance for loan and lease losses that should have been maintained in accordance with the Instructions. If necessary to comply with this paragraph 4(b), the Bank shall file amended Reports of Condition and Income within 10 days from the effective date of this ORDER.
   (c) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the board of directors of the Bank shall: (1) review the adequacy of the Bank's allowance for loan and lease losses, (2) provide for an adequate allowance, and (3) accurately report the allowance in any such Report of Condition and Income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the allowance, and the basis for determining the amount of allowance provided.

   [.5] 5. (a) Within 30 days from the effective date of this ORDER, the board of directors shall develop a written plan of action to lessen the Bank's risk position in each line of credit aggregating $40,000 or more which was classified "Substandard" or "Doubtful" as of October 20, 1989. In developing such plan, the Bank shall, at a minimum:

       (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.
    Based upon such review and evaluation, the written plan of action shall: (A) establish target dollar levels to which the Bank shall reduce the aggregate dollar volume of "Substandard" or "Doubtful" classifications within 6 and 12 months from the effective date of this ORDER; and (B) provide for the submission of written monthly progress reports to the Bank's board of directors for review and notation in the board minutes. As used in this paragraph 5, "reduce" means to (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC.
   (b) The written plan of action described by paragraph 5(a) and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner of Finance for the State of Missouri ("Commissioner") for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written plan of action, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its Institution-Affiliated Parties shall follow the written plan of action and/or any subsequent modification.

   [.6] 6. Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss", "Doubtful", or "Substandard", and is uncollected, unless a majority of the Bank's board of directors first (1) determines that such advance is in the best interest of the Bank, (2) determines that the Bank has satisfied the requirements set out in paragraph 5 of this ORDER as to such borrower, and (3) approves such advance. A written record of the board of directors' determination and approval of any advance under the terms of this paragraph 6 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the board of directors. The requirements of this paragraph 6 do not prohibit the Bank from renewing any credit already extended to the borrower.

   [.7] 7. Effective the date of this Order, the Bank shall not accrue interest on any loan that is, or becomes, 90 days or more delinquent as to principal or interest, unless the loan is both well secured and in the process of collection; "well secured" and "in the process of collection" shall have the same meaning as those terms have in the prevailing Instructions for the Reports of Condition and Income. The Bank shall reverse on its books all previously accrued but {{8-31-93 p.C-273}}uncollected interest on any loan that has ceased to accrue interest pursuant to this provision.

   [.8] 8. No more than 60 days from the effective date of this ORDER, the Bank shall review the Bank's written loan policies and shall review the Bank's written loan policies and shall record the results of such review in the board of directors' minutes. Thereafter, the Bank and its Institution-Affiliated Parties shall follow the written loan policies.

   [.9] 9. (a) No more than 30 days from the effective date of this ORDER, the Bank shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:

       (i) identification of the major areas in, and means by, which the board of directors 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) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan and any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its Institution-Affiliated Parties shall follow the written profit plan and/or any subsequent modification thereto.

   [.10] 10. The Bank shall not declare or pay and cash dividends unless:

       (a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
       (b) after payment of such dividends, the equity capital ratio specified in paragraph 3(e) shall not be less than 7 percent and the Bank's allowance for loan and lease losses shall be adequate as described in paragraph 4 of this ORDER;
       (c) such declaration and payment of dividends shall be approved in advance by the board of directors of the Bank; and
       (d) such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director and the Commissioner, which approval shall not be unreasonably withheld.

   [.11] 11. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (1) in conjunction with the Bank's next shareholder communication, and also (2) 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, Registration and Disclosure Unit, Washington, D.C. 20429, 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.

[.12] 12. (a) No more than 60 days from the effective date of this ORDER, the Bank shall correct the technical exceptions on loans noted on pages 2-e through 2-e-2 of the FDIC's Report of Examination of the Bank as of October 20, 1989.
   (b) No more than 60 days from the effective date of this ORDER, the Bank shall correct the cited deficiencies in the loans listed for "Special Mention" on page 2-c of the FDIC's Report of Examination of the Bank as of October 20, 1989.
   (c) No more than 60 days from the effective date of this ORDER, the Bank shall correct the internal routines and controls deficiencies detailed on page 6-a of the FDIC's Report of Examination of the Bank as of October 20, 1989.

   [.13] 13: The Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof every 90 days, beginning 90 days from the effective date of the ORDER. In addition, the Bank shall furnish such reports on request of either the Regional Director or the Commissioner. All progress reports and {{8-31-93 p.C-274}}other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   14. This ORDER shall become effective ten (10) days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank, its Institution-Affiliated Parties, successors and assigns.
   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 this 6th day of March, 1990.
   Pursuant to delegated authority.

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