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FDIC Enforcement Decisions and Orders

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{{6-30-94 p.C-1177}}
   [10,275] In the Matter of The Farmers State Bank of Norwich, Kansas, Norwich, Kansas, Docket No. FDIC-91-158b (7-12-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate capital; operating with inadequate allowance for loan and lease losses; failing to provide adequate supervision over the Bank's affairs; and failing to submit Reports of Condition and Income in accordance with instructions. (This order was terminated by order of the FDIC dated 4-21-94; see ¶ 15,856.)

   [.1] Management—Qualifications—Review
   [.2] Assets—Adversely Classified—Eliminate/Reduce
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.5] Dividends—Restricted
   [.6] Shareholders—Disclosure—Cease and Desist Order
   [.7] Compliance Reports—Frequency

{{6-30-94 p.C-1178}}
In the Matter of

THE FARMERS STATE BANK OF NORWICH,
KANSAS NORWICH, KANSAS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   The Farmers State Bank of Norwich, Kansas, Norwich, Kansas ("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, 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 June 11, 1991, 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 U.S.C. § 1813(u), and its successors and assigns cease and desist from the following unsafe and unsound banking practices:
   A. operating with inadequate Tier 1 or core capital for the kind and quality of assets held;
   B. operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   C. operating with management that is failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices; and
   D. failing to submit Reports of Condition and Income in accordance with prevailing instructions.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. (a) (i) No more than 60 days from the effective date of this ORDER, the Bank shall have and thereafter retain qualified management. Such management shall include a qualified full-time 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. Such management shall also include a qualified full-time senior lending officer who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining the lending policies of the Bank. The senior lending officer shall have an appropriate level of lending, collections, and loan supervision 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 identity of said chief executive officer and said senior lending officer. Prior to 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. § 1831i; and section 303.14 of the FDIC's Rules and Regulations, 12 C.F.R. § 303.14.

       (ii) 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 shall eliminate from its books, by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss" as of January 25, 1991, which have not been previously collected, charged off, or otherwise {{9-30-91 p.C-1179}}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) The Bank shall have and maintain an adequate allowance in accordance with the requirements of the Instructions for Preparation of 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 December 31, 1990, and the effective date of this ORDER, shall, at a minimum, reflect an allowance that should have been maintained in accordance with the Instructions. If necessary to comply with this paragraph, 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 and Income required to be filed by the Bank after the effective date of this ORDER, the board of directors of the Bank shall: (i) review the adequacy of the Bank's allowance, (ii) provide for an adequate allowance, and (iii) 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.

   [.4] 4. (a) As used in this ORDER:

       (i) "Tier 1 or core capital" ("Tier 1 capital") means the same as the term in section 325.2(m) of the FDIC's Rules and Regulations, 56 Fed. Reg. 10154 (1991), to be codified at 12 C.F.R. § 325.2(m).
       (ii) "Noncumulative perpetual preferred stock" means the same as the term in section 325.2(j) of the FDIC's Rules and Regulations, 56 Fed. Reg. 10154 (1991), to be codified at 12 C.F.R. § 325.2(j).
       (iii) "Total assets" means the same as the term in section 325.2(n) of the FDIC's Rules and Regulations, 56 Fed. Reg. 10154 (1991), to be codified at 12 C.F.R. § 325.2(n).
       (iv) "Allowance for loan and lease losses" means the same as the term in section 325.2(a) of the FDIC's Rules and Regulations, 56 Fed. Reg. 10154 (1991), to be codified at 12 C.F.R. § 325.2(a), and in the Instructions.
       (v) "Securities" means common and noncumulative perpetual preferred stock.
   (b) No more than 60 days from the effective date of this ORDER, the Bank shall increase its Tier 1 capital by not less than $937,000. Such increase in Tier 1 capital may be accomplished by:
       (i) the sale of new offerings of common or noncumulative 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 Tier 1 capital required by this paragraph 4(b);
       (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 January 25, 1991, 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 pursuant to paragraph 2 of this ORDER. Collections on loans or leases classified "Loss" or "Doubtful" which have been charged off shall be credited to the Bank's allowance and, if the board of directors' review of the adequacy of the allowance required by paragraph 3 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 Tier 1 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.
   (c) If all or part of the increase in Tier 1 capital required under paragraph 4(b) of {{9-30-91 p.C-1180}}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 Section, 550 - 17th Street, N.W., Washington, D.C. 20429, for review. Any changes requested in the materials by the FDIC shall be made prior to their dissemination. In addition, any terms and conditions of the issue of new securities shall be submitted to the Regional Director for prior approval.
   (d) In complying with the provisions of paragraph 4(c) 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 4(d) 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.
   (e) After appropriate entries for an adequate allowance are made in accordance with the requirements of paragraph 3 of this ORDER, but no later than September 30, 1991, the Bank shall have and maintain Tier 1 capital at or in excess of 6 percent of the Bank's total assets ("Tier 1 capital ratio"). From and after September 30, 1991, for purposes of calculating Tier 1 capital ratio. Tier 1 capital shall be the dollar amount reported in the Bank's most recent Report of Condition and Income.
   (f) During the period this ORDER is in effect, if the Tier 1 capital ratio declines below 6 percent, the Bank shall, within 60 days after the date on which the said ratio so declined, submit a written plan to the Regional Director for approval describing the means and timing by which the Bank shall increase such ratio up to or in excess of 6 percent. Upon receiving written notification of the approval of the plan, the Bank shall increase its Tier 1 capital ratio to equal or exceed 6 percent in accordance with the approved plan and shall thereafter maintain its Tier 1 capital ratio at or in excess of such level while this ORDER is in effect.
   (g) 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 4(b) through 4(f) of this ORDER, including, at a minimum, any action to increase its Tier 1 capital by each of the methods specified in paragraphs 4(b)(i) through 4(b)(vii) of this ORDER.
   (h) Nothing in this ORDER shall operate to subject any individual director of the Bank to a Federal District Court order of enforcement pursuant to section 8(i)(1) of the Act, 12 U.S.C. § 1818(i)(1), or imposition of civil money penalties pursuant to section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2), for failure to utilize such director's personal assets to satisfy the capital requirements of paragraphs 4(a) through 4(f) of this ORDER. For the purpose of this paragraph 4(h), the diminution value of stock held by any director as the result of the sale or new offerings of common stock or noncumulative perpetual preferred stock pursuant to paragraph 4(b)(i) of this ORDER shall not be considered to be utilization of such director's personal assets.

   [.5] 5. The Bank shall not pay or declare any cash dividends without the prior written consent of the Regional Director and the State Bank Commissioner.

   [.6] 6. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (a) in conjunction with the Bank's next shareholder communication, and also (b) 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 de- {{7-31-95 p.C-1181}}scription and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Section, 555 - 17th Street, N.W., 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.

   [.7] 7. Beginning 90 days from the effective date of this ORDER, the Bank shall furnish written progress reports every 90 days to the Regional Director and the State Bank Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results. In addition, the Bank shall furnish such reports on request of either the Regional Director or the State Bank Commissioner. All progress reports and 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.
   This ORDER shall become effective 10 days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank and 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.
   Pursuant to delegated authority.
   Dated this 12th day of July, 1991.

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