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FDIC Enforcement Decisions and Orders

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{{5-31-91 p.C-349}}
   [10,070] In the Matter of Crossroads Bank, Victoria, Texas, Docket No. FDIC-90-77b (5-8-90).

   Bank to cease and desist from practices such as operating Bank with management whose policies and practices are detrimental to Bank, with inadequate supervision and direction by Board of Directors, with inadequate level of capital protection, and with an excessive level of adversely classified assets; engaging in hazardous lending and ineffective and lax collection practices; failing to provide an adequate reserve for loan losses; extending credit which is inadequately secured and without appropriate supporting documentation; refinancing credits to borrowers in weak financial positions without improving collateral or structuring repayment programs; renewing or extending due dates or loans without collection of interest due; failing to accurately reflect the financial condition of the Bank; failing to maintain an adequate internal watch list; operating Bank with a high volume of loan documentation deficiencies; failing to maintain current independent real estate appraisals on loans and other real estate; and operating Bank with inadequate fidelity insurance coverage. (This order was terminated by order of the FDIC, dated 3-29-91; see15,249.)

   [.1] Primary Capital—Increase—Methods
   [.2] Shareholders—Dividends—Approval
   [.3] Assets—Adversely Classified—Reduce—Written Plan
   [.4] Loan Loss Reserve—Adequacy—Review
   [.5] Reports on Financial Condition—Amendment—Filing
   [.6] Loans—Adversely Classified—Curtail
   [.7] Management—Qualifications—Compliance
   [.8] Board of Directors—Compliance Committee—Written Report
   [.9] Loan Policy—Minimum Requirements—Review
   [.10] Technical Violations—Eliminate/Correct
   [.11] Fidelity Insurance—Adequate Coverage
   [.12] Shareholders—Disclosure—Cease and Desist Order
   [.13] Compliance—Progress Reports—Frequency

In the Matter of

CROSSROADS BANK
VICTORIA, TEXAS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   The Crossroads Bank, Victoria, Texas ("Bank"), through its board of directors, having been advised of its right to the issuance and service of 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) 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 April 5, 1990, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
{{5-31-91 p.C-350}}
   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 ORDERED, that the Bank and institution-affiliated parties of the Bank cease and desist from the following unsafe or unsound banking practices:
   (a) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   (b) Operating the Bank without adequate supervision and direction by the board of directors over the management of the Bank;
   (c) Operating with an inadequate level of capital protection;
   (d) Operating the Bank with an excessive level of adversely classified assets;
   (e) Engaging in hazardous lending and ineffective and lax collection practices;
   (f) Failing to provide an adequate reserve for loan losses;
   (g) Extending credit which is inadequately secured and without adequate and appropriate supporting documentation;
   (h) Refinancing credits to borrowers in weak financial positions without improving collateral margins or establishing structured repayment programs;
   (i) Renewing or extending the due dates of loans without collection in cash of interest due;
   (j) Failing to accurately reflect the condition of the Bank in published statements and Consolidated Reports of Condition and Reports of Income;
   (k) Failing to maintain an adequate internal watch list;
   (l) Operating the Bank with a high volume of loan documentation deficiencies;
   (m) Failure to maintain current, independent real estate appraisals on all loans and other real estate; and
   (n) Operating the Bank without adequate fidelity insurance coverage.
   IT IS FURTHER ORDERED, that the Bank and institution-affiliated parties of the Bank take affirmative action as follows:

   [.1] 1. (a) Within 90 days after the effective date of this ORDER, the Bank shall increase its primary capital by no less than $250,000; and for so long thereafter as this ORDER is outstanding, the Bank shall maintain adjusted primary capital equal to or greater than 7.5 percent of the Bank's adjusted total assets. Such increase in primary capital and any increase in primary capital necessary to meet the ratio required by this ORDER may be accomplished by:

       (i) The sale of securities in the form of common stock; or
       (ii) The collection in cash of assets classified Loss as of November 17, 1989, and charged off in accordance with the provisions of this ORDER without loss or liability to the Bank; or
       (iii) The collection in cash of assets charged off prior to November 17, 1989; or
       (iv) The direct contribution of cash subsequent to November 17, 1989 by the directors and/or shareholders of the Bank; or
       (v) Any other method approved by the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") and the Banking Commissioner for the State of Texas (Commissioner).
   (b) If the ratio of adjusted primary capital to adjusted total assets is less than 7.5 percent as determined at an examination or visitation by the FDIC or the State banking department ("State"), the Bank shall, within 30 days after receipt of a written notice of the capital deficiency from the Regional Director of the Commissioner, present to the Regional Director and the Commissioner a plan to increase the primary capital of the Bank or to take other measures to bring the ratio to 7.5 percent. After the Regional Director and Commissioner respond to the plan, the board of directors of the Bank shall adopt the plan, including any modifications or amendments requested by the Regional Director and Commissioner. Thereafter, the Bank shall immediately initiate measures detailed in the plan, to the extent such measures have not previously been initiated, to increase its primary capital by an amount sufficient to bring the ratio to 7.5 percent within 90 days after the Regional Director and the Commissioner respond to the plan.
   (c) If all or part of the increase in primary capital required by this ORDER is to be accomplished by the sale of new securities, the board of directors of the Bank shall {{4-1-90 p.C-351}}adopt and implement a plan for the sale of such additional securities, including soliciting proxies and the voting of any shares or proxies owned 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 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 plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, Washington, D.C. 20429, for review. Any changes requested to be made in the plan or the materials by the FDIC shall be made prior to their dissemination. If the increase in primary capital is provided by the sale of perpetual preferred stock and/or mandatory convertible debentures, then all terms and conditions of the issue including, but not limited to, those terms and conditions relative to interest rate and any convertibility factor shall be presented to the Regional Director for prior approval.
   (d) In complying with the provisions of this ORDER and until such time as any such public offering is terminated, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities 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 the Bank's securities. The written notice required by this paragraph shall be furnished within 10 days after the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber who received or was tendered the information contained in the Bank's original offering materials.
   (e) For the purposes of this ORDER the terms "primary capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively subsections 325.2(h) and (k), 12 C.F.R. §325.2(h) and (k). "Adjusted primary capital" and "adjusted total assets" shall be calculated according to the methodology set forth in the Analysis of Capital section in a report of examination or visitation of the FDIC or the State.

   [.2] 2. While this ORDER is in effect, the Bank shall not declare or pay either directly or indirectly any cash dividend to shareholders without the prior written consent of the Regional Director and the Commissioner.

   [.3] 3. (a) Upon the effective date of this ORDER, the Bank shall, to the extent that it has not previously done so, eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss by the FDIC as a result of its examination of the Bank as of November 17, 1989. Reduction of these assets through proceeds of loans made by the Bank is not considered "collection" for the purpose of this paragraph.
   (b) Within 60 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner to reduce the remaining assets classified Substandard as of November 17, 1989. At a minimum, the plan shall include the following:

       (i) A schedule providing quarterly goals to reduce the remaining adversely classified assets as of November 17, 1989 to levels representing not more than a specified percentage of total equity capital and reserves as reported each quarter by the Bank in its Consolidated Reports of Condition and Reports of Income and shall include no less than six consecutive quarterly target dates;
       (ii) An explanation showing the complete rationale used by the Bank in constructing the reduction schedule; and,
       (iii) A provision requiring, at a minimum, quarterly reviews by the Bank's board of directors whereby the extent of the Bank's compliance with the plan is expressly addressed with the results of each review to be recorded in the corporate minutes of the board of directors.
   (c) Upon written notice from the Regional Director or the Commissioner that the submitted plan is not acceptable, the Bank shall, within 30 days after receipt of such notice, submit amendments to the plan to {{4-1-90 p.C-352}}the Regional Director and the Commissioner, including any modifications or amendments requested by the Regional Director or Commissioner. Upon written notice that the plan is accepted, it shall be adopted by the board of directors of the Bank. The Bank shall thereafter immediately initiate measures detailed in the plan to the extent such measures have not previously been initiated.
   (d) For purposes of the plan, the reduction of the level of adversely classified assets as of November 17, 1989, to a specified percentage of total equity capital and reserves may be accomplished by:
       (i) charge-off;
       (ii) collection;
       (iii) sufficient improvement in the quality of adversely classified assets so as to warrant removing any adverse classification, as determined by the FDIC; or
       (iv) increase of total equity capital and reserves.
   (e) While this ORDER is in effect, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as determined at any examination or visitation conducted by the FDIC or the State at such time as the report of examination or visitation is received by the Bank.

   [.4] 4. (a) Within 10 days after the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve shall be established by charges to current operating income. Prior to the end of each calendar quarter, the board of directors of the Bank shall review the adequacy of the Bank's reserve for loan losses. Such reviews shall include, at a minimum, the Bank's loan loss experience, an estimate of potential loss exposure in the portfolio, trends of delinquent and nonaccrual loans and prevailing and prospective economic conditions. The minutes of the board meetings at which such reviews are undertaken shall include complete details of the reviews and the resulting recommended increases in the reserve for loan losses.

   [.5] (b) Within 30 days after the effective date of this ORDER, the Bank shall review Consolidated Reports of Condition and Reports of Income filed with the FDIC on or after December 31, 1989, and amend said reports if necessary to properly reflect the financial condition of the Bank as of the date of each such report. In particular, such reports shall contain an adequate provision for loan losses. Reports filed after the effective date of this ORDER shall also accurately reflect the financial condition of the Bank as of the reporting date.

   [.6] 5. (a) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has an extension of credit with the Bank that has been classified Loss, in whole or in part, and is uncollected or to any borrower who is already obligated in any manner to the Bank on any extension of credit, including any portion thereof, that has been charged off the books of the Bank and remains uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing credit already extended to a borrower after full collection, in cash, of interest due from the borrower.
   (b) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower whose extension of credit is classified Substandard, in whole or in part, and is uncollected unless the Bank's board of directors has signed a detailed written statement giving reasons why failure to extend such credit would be detrimental to the best interests of the Bank. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.

   [.7] 6. The Bank shall have and retain qualified management. At a minimum, such 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. Such person shall be provided the necessary written authority to implement the provisions of this ORDER. The qualifications of management shall be assessed on its ability to: (i) comply with the requirements of the 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, and liquidity.

   [.8] 7. Within 60 days after the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure {{10-31-93 p.C-353}}that the Bank complies with the provisions of this ORDER. At least 50 percent of the members of such committee shall be directors not employed in any capacity by the Bank other than as a director. The committee shall report monthly to the full board of directors and a copy of the report and any discussion relating to the report or the ORDER shall be noted in the records of the board of directors. Establishment of this committee does not diminish the responsibility or liability of the entire board of directors to ensure compliance with the provisions of this ORDER.

   [.9] 8. Within 60 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies and procedures to provide effective guidance and control over the Bank's lending function. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations or visitations and shall include, at a minimum, the following:
   (a) Standards for extending credit to Bank directors and their related interests;
   (b) A provision that deviations from the written lending policies and procedures require prior approval of the board of directors of the bank;
   (c) A requirement that all problem real estate loans and other real estate assets have current independent real estate appraisals which reflect current market conditions, and
   (d) A provision to strengthen the internal loan review function to develop a more stringent review process for the identification and grading of problem loans.

   [.10] 9. Within 90 days after the effective date of this ORDER, the Bank, to the best of its ability using reasonable effort, shall eliminate and/or correct all technical exceptions with regard to loan documentation existing in the Bank as of November 17, 1989, as more fully set out on page 2-d of the November 17, 1989 Report of Examination.

   [.11] 10. The Bank shall immediately initiate good faith efforts to obtain adequate fidelity insurance coverage and document its files accordingly.

   [.12] 11. After the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish 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.

   [.13] 12. Within 30 days after the end of the first calendar quarter following the effective date of this ORDER, and within 30 days after the end of each calendar quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this 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 the Commissioner have released the Bank in writing from making further reports.
   13. The effective date of this ORDER shall be 10 days after the date of its issuance. This ORDER shall be binding upon the Bank and institution-affiliated parties of the Bank.
   This ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Pursuant to delegated authority.
   Dated at Dallas, Texas, this 8 day of May, 1990.

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