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FDIC Enforcement Decisions and Orders

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{{1-31-93 p.C-2381}}
   [10,562] In the Matter of The First State Bank, Stroud, Oklahoma, Docket No. FDIC-92-152b (6-11-92).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate capital; operating with excessive volumes of adversely classified assets; operating with an inadequate loan policy; operating with inadequate liquidity; operating without adequate investment policy; operating in violation of applicable laws or regulations; and operating in contravention of written loan policies and procedures. (This order was terminated by order of the FDIC dated 10-29-92; see ¶15,552.)

{{1-31-93 p.C-2382}}
   [.1] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.2] Dividends—Restricted
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Management—Qualifications—Review
   [.5] Lending and Collection Policy—Minimum Requirements
   [.6] Violations of Law—Eliminate/Correct
   [.7] Funds Management—Written Policy Required
   [.8] Shareholders—Disclosure—Cease and Desist Order
   [.9] Compliance Reports—Frequency

In the Matter of

THE FIRST STATE BANK
STROUD, OKLAHOMA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-152b

   The First State Bank, Stroud, Oklahoma ("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 and violations of law and/or regulations 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 May 15, 1992, whereby, solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and/or regulations, 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 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 ORDERED, that the Bank and institution-affiliated parties of the Bank cease and desist from the following unsafe or unsound banking practices and violations of laws and/or regulations:
   (a) Operating with an inadequate level of capital protection;
   (b) Operating the Bank with an excessive level of adversely classified assets;
   (c) Operating the Bank without adequate written loan policies and procedures;
   (d) Operating the Bank without adequate liquidity or proper regard for funds management;
   (e) Operating the Bank without an adequate investment policy which addresses funding strategies and liquidity objectives;
   (f) Operating the Bank in violation of applicable Federal laws and regulations as more fully set forth on pages 6-b and 6-b-1 of the Report of Examination of the Bank as of January 10, 1992;
   (g) Operating the Bank in contravention of written loan policies and procedures.

[.1] 1. (a) On or before October 31, 1992, the Bank shall submit a written plan to the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") and the Bank Commissioner for the State of Oklahoma ("Commissioner") to increase its Tier 1 capital by no less than $300,000. The capital plan shall also cause the Bank to achieve and maintain adjusted Tier 1 capital, after establishing an adequate allowance for loan and lease losses, equal to or greater than six percent of the Bank's adjusted total assets. 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 {{8-31-92 p.C-2383}}Regional Director and the Commissioner. Thereafter, the Bank shall immediately initiate measures detailed in the plan, to the extent such measures have not previously been initiated to effect compliance with the plan within 90 days after the Regional Director and Commissioner respond to the plan. Such increase in Tier 1 capital and any increase in Tier 1 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 direct contribution of cash subsequent to January 10, 1992 by the directors and/or shareholders of the Bank; or
       (iii) Any other method approved by the Regional Director and the Commissioner.
   (b) If the ratio of adjusted Tier 1 capital to adjusted total assets is less that six percent as determined at an examination 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 or the Commissioner, present to the Regional Director and the Commissioner another plan to increase the Tier 1 capital of the Bank or to take other measures to bring the ratio to six 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 the 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 Tier 1 capital by an amount sufficient to bring the ratio to six percent within 90 days after the Regional Director and the Commissioner respond to the plan.
   (c) If all or part of the increase in Tier 1 capital required by this ORDER is to be accomplished by the sale of new securities, the board of directors of the Bank shall 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 Tier 1 capital is to be provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue 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) In addition to the requirements of subparagraphs 1(a) - (b), the Bank shall comply with the FDIC's Statement of Policy on Risk-Based Capital found in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, App. A.
   (f) For the purposes of this ORDER the terms "allowance for loan and lease losses," "Tier 1 capital," and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and {{8-31-92 p.C-2384}}Regulations, respectively subsections 325.2(a), (m), and (n), 12 C.F.R. § 325.2(a), (m), and (n). "Adjusted Tier 1 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 of the FDIC.

[.2] 2. While this ORDER is in effect, the Bank shall neither declare nor pay, directly or indirectly, any cash dividend to shareholders without the prior written consent of the Regional Directors 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 January 10, 1992. Reduction of these assets through proceeds of loans made by the Bank shall not be considered "collection" for the purpose of this paragraph.
   (b) On or before October 31, 1992, the Bank shall submit a written plan to the Regional Director and the Commissioner to reduce the remaining assets classified Substandard as of January 10, 1992. At a minimum, the plan shall include the following:

       (i) A schedule providing quarterly goals to reduce the remaining adversely classified assets as of January 10, 1992 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 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 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 then immediately initiate measures detailed in the plan to the extent such measures have not been initiated.
   (d) For purposes of the plan, the reduction of the level of adversely classified assets as of January 10, 1992, 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 the 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 conducted by the FDIC or the State at such time as the report of examination is received by the Bank.

   [.4] 4. The Bank shall have and retain qualified management. Each member of management shall possess qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications of management personnel shall be evaluated on their 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. During the life of the ORDER, the Bank shall notify the Regional Director and the Commissioner in writing of any changes in management. The notification must include the name(s) and background(s) of any replacement personnel and must be provided prior to the individual(s) assuming the new position(s).

   [.5] 5. Within 60 days after the effective {{8-31-92 p.C-2385}}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, and shall include, at a minimum, the following:

       (a) A requirement that the Bank shall not purchase loan participations until the Bank has obtained complete financial information and the participations are in full compliance with the Bank's lending policies and procedures;
       (b) Standards for extending credit to out-of-territory borrowers;
       (c) Standards for extending credit to Bank directors, officers, shareholders and their related interests which take into account applicable Federal and State laws governing such extensions of credit;
       (d) A provision that deviations from the written lending policies and procedures require prior approval of the board of directors of the Bank;
       (e) A provision that establishes the lending limit of each loan officer;
       (f) A requirement that extensions of credit shall not be refinanced, reworked or renewed unless current financial information and documentation have been obtained;
       (g) Standards setting forth appropriate limitations on concentrations of credit;
       (h) A requirement that all loans shall have written repayment understandings;
       (i) Standards under which unsecured loans may be granted;
       (j) Guidelines under which loans are renewed or have their due dates extended (i) without full collection of interest thereon, (ii) by acceptance of separate notes in payment of interest, or (iii) by capitalization of interest to the balance of the note;
       (k) Limitations on the amount advanced in relation to the value of the collateral securing the credit;
       (l) A provision specifically outlining the collection procedures to be taken by the Bank when borrowers fail to make timely payments;
       (m) Guidelines for determining what rate of interest will be charged on all secured and unsecured loans; and
       (n) A provision outlining the documentation required on all secured loans.

   [.6] 6. After the effective date of this ORDER, the Bank, consistent with sound banking practices, shall eliminate and/or correct all violations of laws and/or regulations existing in the Bank as of January 10, 1992, as more fully set forth on pages 6-b and 6-b-1 of the January 10, 1992 Report of Examination. In addition, the Bank shall ensure its future compliance with all applicable laws and regulations.

   [.7] 7. Within 60 days after the effective date of this ORDER, the Bank shall amend its written funds management policy. The Bank shall immediately initiate the measures detailed in the policy to the extent such measures have not been in initiated. The funds management policy and its implementation shall be in a form and manner acceptable to the Regional Director, as determined at subsequent examinations and shall include, at a minimum, the following:

       (a) An asset/liability management strategy to achieve an acceptable rate sensitivity balance between investments and funding sources; and
       (b) Procedures which will enable to board and management to monitor the Bank's liquidity position and maintain liquidity at an adequate level.

   [.8] 9. 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.

   [.9] 10. Within 30 days after the end of the first calendar quarter following the effective date of this ORDER, and within 30 {{8-31-92 p.C-2386}}days after the end of each successive calendar quarter, 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 additional reports.
   11. 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 all institution-affiliated parties of the Bank.
   The provisions of 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.
   Dated at Dallas, Texas, this 11th day of June, 1992.
   Pursuant to delegated authority.

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