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FDIC Enforcement Decisions and Orders

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{{4-30-93 p.C-1157}}
   [10,272] In the Matter of Worthington State Bank, Worthington, Indiana, Docket No. FDIC-91-191b (7-9-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with management whose policies are detrimental to the Bank; failing to provide adequate supervision over the Bank's affairs; operating with inadequate capital; operating with an inadequate level of earnings; paying excessive dividends; following hazardous lending and lax collection practices; operating with inadequate allowance for loan and lease losses; operating with excessive volumes of adversely classified assets; operating with inadequate loan, liquidity, and asset/liability management policies; operating without a budget; operating in violation of applicable laws or regulations; operating with dependence on volatile liabilities and brokered deposits; and operating with inadequate routine and controls policies. (This order was terminated by order of the FDIC dated 2-19-93; see ¶ 15,610.)

   [.1] Board of Directors—Election—Outside Directors Added
   [.2] Management—Qualifications—Review
   [.3] Personnel—Review—Training
   [.4] Capital—Total Capital—Increase—Methods
   [.5] Dividends—Restricted
   [.6] Budget—Annual Plan Required
{{4-30-93 p.C-1158}}
   [.7] Assets—Adversely Classified—Eliminate/Reduce
   [.8] Allowance for Loan and Lease Losses—Establish/Maintain
   [.9] Loans—Risk Position—Reduction Required
   [.10] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.11] Loans—Special Mention—Correct Deficiencies
   [.12] Violations of Law—Eliminate/Correct
   [.13] Liquidity Ratio—Written Plan—Minimum Requirements
   [.14] Brokered Deposits—Acceptance Limited—Notice to FDIC Required
   [.15] Loan Policy—Written Revision—Minimum Requirements
   [.16] Assets—Total Assets—Limit on Increase
   [.17] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.18] Compliance Program—Monthly Monitoring
   [.19] Shareholders—Disclosure—Cease and Desist Order
   [.20] Compliance Reports—Frequency

In the Matter of

WORTHINGTON STATE BANK
WORTHINGTON, INDIANA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Worthington State Bank, Worthington, Indiana ("Bank"), 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 regulation alleged to have been committed by the Bank, and of its right to a hearing on the 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 OR AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), with counsel for the Federal Deposit Insurance Corporation ("FDIC"), on July 5, 1991, 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 regulation, 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 be believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws and regulations. 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 U.S.C. § 1813(u), and its successors and assigns, cease and desist from the following unsafe or unsound banking practices and violations of law and regulation:
   A. Operating with a 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 management of the Bank;
   C. Operating with an inadequate level of capital protection for the kind and quality of assets held;
   D. Operating with an inadequate level of earnings;
   E. Paying excessive dividends in relation to the Bank's capital position and earnings capacity;
   F. Operating with hazardous lending and lax collection practices;
   G. Operating with an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans and leases held;
   H. Operating with an excessive level of adversely classified assets;
   I. Operating without adequate loan, li- {{9-30-91 p.C-1159}}quidity and asset/liability management policies;
   J. Operating without a budget;
   K. Violating the State of Indiana legal investment limit restriction as set forth in section 28-1-11-4(a) of the Indiana Code, Ind. Code § 28-1-11-4(a); the State of Indiana legal lending limit restrictions as set forth in section 28-1-13-1 of the Indiana Code, Ind. Code § 28-1-13-1; the minimum capital requirements of section 325.2 of FDIC Rules and Regulations, 12 C.F.R. § 325.3; terms and creditworthiness restrictions in section 215.4(a) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. § 215.4(a); the prior approval requirements of Section 215.4(b) of Regulation O, 12 C.F.R. § 215.4(b); Regulation B-9 of the Department of Financial Institutions for the State of Indiana which requires a write down of sub-investment quality securities; the minimum number of directors requirement of Indiana Code 28-1-5-9(a), Ind. Code § 28-1-5-9(a); the prior notification requirements of Section 32 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831i; and the reporting requirements under section 353.1 of the FDIC Rules and Regulations, 12 C.F.R. § 353.1;
   L. Operating with marginal liquidity and a dependence on volatile liabilities and brokered deposits; and
   M. Operating without adequate internal routine 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) Within 90 days from the effective date of this ORDER, a majority of the Bank's board of directors shall be comprised of and shall thereafter remain comprised of "independent" members. As used in this ORDER, the term "independent" is defined as an individual who is not: (1) an employee, officer or any stockholder owning more than five percent of the outstanding shares of the Bank, Worthington Bancshares, Inc. ("Holding Company"), or any other Bank affiliate as that term is defined in section 23A of the Federal Reserve Act, 12 U.S.C. § 371c; (2) related by blood or marriage to any officer, director or any stockholder owning more than five percent of the outstanding shares of the Bank, the Holding Company, or any other Bank affiliate as that term is defined in section 23A of the Federal Reserve Act, 12 U.S.C. § 371c; (3) indebted to the Bank or to any Bank affiliate, directly or indirectly (including the indebtedness of any "related interest" as that term is defined at 12 C.F.R. § 215.2(k) in an amount exceeding 5 percent of the Bank's unimpaired capital and unimpaired surplus as defined at 12 C.F.R. § 215.2(f). Changes to the structure of the board required by this paragraph may be accomplished, to the extent permissible by State statute and the Bank's bylaws, by means of appointment or by election at a regular or special meeting the Bank's shareholders. Nothing in this ORDER shall act to limit the applicability of the requirements of section 32 of the Federal Deposit Insurance Act. 12 U.S.C. § 1831(i) ("section 32").
   (b) Within 90 days from the effective date of this ORDER, the Bank shall establish loan and investment committees. All of the "independent directors" as defined above shall be members of these committees. A majority of the committees shall be composed of "independent directors".

   [.2] 2. (a) Within 60 days from the effective date of this ORDER, the Bank's board of directors shall submit to the Regional Director and the Director a staffing chart and a written job description for each executive officer of the Bank. In addition, within 60 days from the effective date of this ORDER and annually thereafter, the board of directors shall conduct a review of each executive officer and his or her qualifications for fulfilling his or her responsibilities. Results of this review shall be submitted to the Regional Director and the Director.
   (b) Within 60 days from the effective date of this ORDER, the Bank shall have, and thereafter retain, qualified executive officers. Each executive officer shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. During the life of this ORDER, the Bank shall promptly notify the Regional Director and the Director of any changes of the Bank's executive officers not otherwise required by section 32, 12 U.S.C. § 1831(i), and shall sub- {{9-30-91 p.C-1160}}mit to the Regional Director and the Director 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 the purpose of this paragraph, "executive officer" shall have the meaning ascribed that term in section 215.2(d) of Regulation O, 12 C.F.R. § 215.2(d).
   (c) The qualifications of executive officers shall be assessed on their 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, effective internal controls and liquidity.
   (d) Within 90 days from the effective date of this ORDER, the Bank shall establish a salary committee which will review, adjust and approve the compensation paid to executive officers and Bank employees. A majority of the members of the committee will consist of "independent" directors as defined in subparagraph 1(a) above. The committee shall base its review of the salaries and bonuses of executive officers and employees on the respective duties and performance thereof as determined above. If the committee determines that an individual's current salary exceeds that warranted according to its findings, that individual's salary will be immediately adjusted accordingly.

   [.3] 3. Within 90 days from the effective date of this ORDER, the Bank's board of directors shall prepare a written review of the qualifications and adequacy of the Bank's staff in all functional areas, including the administration and supervision of the loan portfolio. The Bank shall promptly thereafter commence a program to hire and train the personnel needed to meet the Bank's staffing requirements as determined in the review. The results of this review shall be submitted to the Regional Director and the Director.

   [.4] 4. (a) Within 120 days from the effective date of this ORDER, the Bank shall increase its Total Capital by not less than $1,000,000.
   (b) Within 30 days of each June 30 or December 31 following the required date of compliance with paragraph 4(a), the Bank shall determine its level of Tier 1 Capital as a percentage of its Total Assets and its level of Total Capital as a percentage of its Total Assets for the calendar quarter ending on the June 30 and December 31 date ("Tier 1 Capital ratio" and "Total Capital ratio"). If the Tier 1 Capital ratio is less than 6.5 percent, the Bank shall, within 90 days of the date of the required determination, increase its Tier 1 Capital ratio to not less than 6.5 percent, calculated as of the end of that preceding semiannual period. If the Total Capital ratio is less than 8.0 percent, the Bank shall, within 90 days of the date of the required determination, increase its Total Capital ratio to not less than 8.0 percent, calculated as of the end of that preceding semiannual period. For the purposes of this ORDER, Tier 1 Capital, Total Capital, and Total Assets shall be calculated in accordance with Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325 ("Part 325"), and Appendix A thereof.
   (c) Any increase in Total Capital necessary to meet the requirements of this paragraph may be accomplished by the following:

       (i) The sale of securities constituting Total Capital under Appendix A of Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, Appendix A; or
       (ii) The collection in cash of assets previously charged off; or
       (iii) The direct contribution of cash by the directors, holding company and/ or the shareholders of the Bank; or
       (iv) Any other means acceptable to the Regional Director and Director; or
       (v) Any combination of the above means.
   (d) If all or part of the increase in capital required by this paragraph is to be accomplished by the sale of new securities, the board of directors of the Bank shall forthwith adopt and implement a written plan for the sale of such additional securities, including the voting of any shares owned or proxies held or con- {{9-30-91 p.C-1161}}trolled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank 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 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 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 its review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination.
   (e) In complying with the provisions of subparagraph (d) of this paragraph, the Bank shall provide to any subscriber and/ or purchaser of the Bank 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 the Bank Securities. The written notice required by this paragraph shall be furnished within ten 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 Bank Securities who received or was tendered the information contained in the Bank's original offering materials.
   (f) The capital ratio analysis as of June 30 and December 31 of each year as required by this paragraph shall not negate the responsibility of the Bank 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 Bank.

   [.5] 5. During the life of this ORDER, the Bank must give 30 days prior written notification to the Regional Director and the Director of any intention to pay cash dividends, which the Regional Director and the Director may decline.

   [.6] 6. (a) Within 90 days from the effective date of this ORDER, the Bank shall formulate and fully implement, a written plan and comprehensive budget for calendar year 1991 for all categories of income and expense. Prior to December 1st of each year while this ORDER is in effect, the Bank shall annually formulate and fully implement, for each succeeding calendar year, a written plan and a comprehensive budget for all categories of income and expense.
   (b) The budgets required by this paragraph shall contain formal goals and strategies, consistent with safe and sound banking practices, for the purpose of increasing net income and reducing the Bank's overhead. Further, the budget shall include adequate provisions for maintaining an acceptable balance for the allowance for loan and lease losses.
   (c) Prior to the end of each calendar quarter, the Bank shall evaluate its actual performance in relation to projections and goals established in the plan and budget required by this paragraph and shall record the results of each evaluation and any actions taken by the Bank pursuant thereto in the minutes of the board of directors meeting at which such evaluation is made and/or action is taken.
   (d) The plan and budget, and the evaluation of the Bank's performance required by this paragraph, shall be submitted to the Regional Director and the Director for review and comment.

   [.7] 7. Upon the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" in the December 31, 1990 Report of Examination prepared by the FDIC ("Report"). These charge-offs should be reflected on the Bank's Reports of Condition and Income as of December 31, 1990. Reports of Condition and Income required by the FDIC as of December 31, 1990 shall be amended and refiled if they do not reflect the charge-off of these items. Reduction of these assets with proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.

   [.8] 8. (a) Within 30 days from the effective date of this ORDER, the Bank shall {{9-30-91 p.C-1162}}replenish its allowance for loan and lease losses 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 Bank shall make a provision to the allowance for loan and lease losses which, after careful review and consideration by the board of directors, reflects the potential for further losses in all loans in the Bank's portfolio, including but not limited to further losses in the "Substandard" loan classifications in the Report and in any subsequent reports of examination prepared by the FDIC or Indiana Department of Financial Institutions.
   (c) Within 30 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC as of December 31, 1990 shall be amended and refiled if they do not reflect a provision for loan losses and allowance for loan and lease losses which are adequate considering the condition of the Bank's loan portfolio and which, at a minimum, incorporate the adjustments required by this paragraph. Any amended reports of condition must be properly republished pursuant to section 28-1-15-2 of the Indiana Code, Ind. Code § 28-1-15-2.
   (d) Prior to the submission or publication of all Reports of Condition and Income required by the FDIC after the effective date of this ORDER, the Bank shall review the adequacy of the allowance for loan and lease losses and accurately report the same. The minutes of the board of directors' meeting at which such review is undertaken shall indicate the results of the review, the amount of the increase in the allowance recommended, if any, and the basis for determination of the amount of allowance provided.

   [.9] 9. Within 90 days from the effective date of this ORDER, the Bank shall formulate, adopt, and submit to the Regional Director and Director for review and comment, a written plan to lessen the Bank's risk position in each asset in excess of $75,000 which is classified "Substandard" in the Report. Such plan shall include, but shall not be limited to, the following:
   (a) Dollar levels to which the Bank 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 Bank's board of directors for review and notation in the minutes of the meetings of the board of directors.
   As used in this paragraph, "reduce" means to (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal from any adverse classification by the FDIC or Department of Financial Institutions;

   [.10] 10. (a) During the life of this ORDER, the Bank 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 Bank's board of directors has adopted a detailed written statement giving the reasons why extending such credit is in the best interest of the Bank. 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.
   (b) During the life of this ORDER, the Bank shall not extend credit to any person or entity, where the funds of such extension of credit are to be used to purchase from the bank any adversely classified loan.

   [.11] 11. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all deficiencies noted in the assets listed for Special Mention in the Report.
   12. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all documentation deficiencies noted on page 2-e of the Report.

   [.12] 13. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulation described on pages 6-b through 6-b-4 of the Report. In addition, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.13] 14. (a) Within 60 days from the effective date of this ORDER, the board of directors of the Bank shall formulate a written plan for improving liquidity and the ratio of volatile liabilities to temporary investments. The plan shall include, but shall not be limited to, the following provisions:

       (i) Requiring computation of the {{9-30-91 p.C-1163}}Bank's liquidity and volatile liability dependency ratios, utilizing the format found on page 5-b of the Report. The computed ratios shall be submitted on a monthly basis to the board of directors for their review;
       (ii) Establishing a line of credit with the Federal Reserve Bank; and
       (iii) Establishing prudent strategies for funding brokered deposits and public fund runoff and reducing the Bank's dependence on volatile liabilities.
   (b) The written plan required to be developed by this paragraph shall be submitted to the Regional Director and the Director for review and comment. Within 30 days of the receipt of any such comments, and after appropriate consideration of any changes recommended, the board of directors shall approve and implement the plan. The approval shall be recorded in the minutes of the meeting of the board of directors.

   [.14] 15. During the life of this ORDER, the Bank shall give written notice to the Regional Director and the Director at such time as the Bank intends to make use of brokered deposits. The notification should indicate how the brokered deposits are to be utilized with specific reference to credit quality of investments/loans and the effect on the Bank's funds position and asset/liability matching. The Regional Director shall have the right to reject the Bank's plans for utilizing brokered deposits. For purposes of this ORDER, brokered deposits are defined to include any deposits funded by third party agents or nominees for depositors, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or asserts a right to federal deposit insurance. Nothing in this ORDER shall act to limit the applicability of Section 29 of the Federal Deposit Insurance Act, 12 U.S.C. § 1831f.

   [.15] 16. (a) Within 90 days from the effective date of this ORDER, the board shall revise its loan policy, to address, at a minimum, the following:

       (i) Guidelines for the volume of loans granted outside the Bank's trade area;
       (ii) Parameters for fee income;
       (iii) Provisions requiring that all extensions of credit have a clearly defined stated purpose;
       (iv) Specific documentation standards including a requirement that the specific purpose of loans be properly identified on file and on each note;
       (v) Maintenance of a watch list and reporting thereof to the board on a monthly basis; and
       (vi) Provisions which establish review procedures to ensure that all lending personnel are adhering to the established procedures and that the directorate is receiving timely and fully documented reports.
   (b) The board will submit the revised loan policy to the Regional Director and the Director for review and comment.

   [.16] 17. During the life of this ORDER, the Bank shall not increase its total assets by more than three percent during any consecutive three month period without first submitting, at least 30 days prior to its implementation, a growth plan to the Regional Director and the Director. Such growth plan shall identify and explain the funding source to support the projected growth, as well as the anticipated use of funds. This growth plan shall not be implemented without the prior written consent of the Regional Director and the Director, and in no event, shall the Bank increase its total assets by more than twelve percent annually. For the purpose of this paragraph, "total assets" has the meaning ascribed to that term by the Federal Financial Institutions Examination Council's Instructions for the Consolidated Reports of Condition and Income.

   [.17] 18. Within 60 days from the effective date of this ORDER, the Bank shall correct all internal routine and control deficiencies detailed on pages 6-d and 6-e of the Report.

   [.18] 19. Within 90 days from the effective date of this ORDER, the Bank's board of directors shall develop, adopt, and implement a program that will provide for proper monitoring, on a monthly basis, of the Bank's compliance with this ORDER and with its written policies.

   [.19] 20. Following 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 (2) in conjunction with its notice or proxy statement preceding the Bank's next share- {{9-30-91 p.C-1164}}holder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, notice or statement shall be sent to the FDIC in 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.

   [.20] 21. On the last day of the second month following the date of issuance of this ORDER, and every third month thereafter, the Bank shall furnish to the Regional Director and the Director, written progress reports, signed by each member of the Bank's board of directors, 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 the Director have in writing released the Bank from making further reports.
   The effective date of this ORDER shall be ten days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and any successors and assigns thereof.
   The provisions of this ORDER shall remain effective and enforceable except that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Pursuant to delegated authority.
   Dated: July 9, 1991.

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