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FDIC Enforcement Decisions and Orders

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{{5-31-94 p.C-3056}}
   [10,730] In the Matter of The Farmers Bank, Windsor, Virginia, Docket No. FDIC-92-292b (2-25-93).

   Bank to cease and desist from such unsafe or unsound practices as failing to provide adequate supervision over the Bank's affairs; operating with management whose policies are detrimental to the Bank; operating without proper internal routine and controls; operating with excessive volumes of adversely classified assets; engaging in practices which produce inadequate operating income; operating with inadequate allowance for loan and lease losses; following hazardous lending and lax collection practices; failing to keep adequate record of actions of the board of directors and its committees; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 3-23-94; see ¶15.R36.)

   [.1] Management—Qualifications—Review
   [.2] Loans—Amount $300,000—Board Approval Required
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Assets—Adversely Classified—Individual Written Plans
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Loans—Overdue—Accrual of Interest
   [.8] Budget and Earnings Plan—Preparation Required
   [.9] Loans—Extensions of Credit—Documentation System Required
   [.10] Violations of Law—Eliminate/Correct
   [.11] Assets—internal Review and Grading System Required
   [.12] Loan Policy—Written Revision—Minimum Requirement
   [.13] Investment Policy—Revision—Minimum Requirements
   [.14] Asset/Liability Management—Written Policy—Minimum Requirements
   [.15] Audit—FDIC Statement of Audit Policy—Conformance Required
   [.16] Board of Directors—Meetings—Recording of Actions Required
   [.17] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

THE FARMERS BANK
WINDSOR, VIRGINIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-292b

   The Farmers Bank, Windsor, Virginia ("Bank"), having received a written Notice of Charges and of Hearing ("NOTICE") on October 2, 1992, detailing unsafe or unsound banking practices and violations of applicable laws and regulations alleged to have been committed by the Bank, and advising the Bank of its right to a hearing regarding such alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), and having waived that right, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF PN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with a representative of the Legal Division of the Federal Deposit Insurance Corporation ("FDIC"), dated February 5, 1993, whereby solely for the purpose of this pr ceeding and without admitting or denying any of the alleged charges of unsafe or unsound banking practices or violations of applicable laws and regulations contained in the NOTICE, 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 committed violations of applicable laws and regulations.
   The FDIC, therefore, accepted the CON- {{4-30-93 p.C-3057}}SENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as such 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/or violations of laws and regulations:
   A. Failing to provide adequate supervision and direction over the affairs of the Bank by the board of directors of the Bank to prevent unsafe or unsound practices and violations of laws and regulations;
   B. Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   C. Failing to operate the Bank with operating policies and procedures, internal controls, and accounting systems adequate to prevent unsafe and unsound practices;
   D. Operating the Bank with an excessive volume of adversely classified assets and past due loans;
   E. Engaging in practices which produce inadequate operating income and excessive loan losses;
   F. Failing to provide and maintain an adequate allowance for loan and lease losses for the volume, kind, and quality of loans held by the Bank;
   G. Engaging in hazardous lending and lax collection practices, including but not limited to: (i) failing to establish and/or enforce repayment programs; (ii) extending credit without properly evaluating collateral protection; (iii) failing to establish an effective loan watch list and grading system; and (iv) extending credit with deficient or inadequate supporting loan documentation, including but not limited to current financial statements;
   H. Failing to create and maintain adequate records of the actions of the board of directors of the Bank and of the committees thereof; and
   I. Engaging in violations of applicable Federal and state laws and regulations, as are more fully described on pages 6-a through 6-a-2 of the FDIC's Report of Examination of the Bank as of December 9, 1991.
   IT IS FURTHER ORDERED that the Bank and its successors and assigns take affirmative action as follows:

    [.1] 1. (a) Within 120 days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include a senior executive officer vested with final executive authority with proven ability in managing a bank of comparable size and a qualified senior loan officer. Such persons 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 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, earnings, and management effectiveness. As long as this ORDER remains in effect, the Bank shall notify the Regional Director of the FDIC's Atlanta Regional Office ("Regional Director") in writing of any proposed changes in management. Such notification shall be in addition to any application and prior approval requirements established by section 32 of the Act, 12 U.S.C. § 1831i, and implementing regulations; must include the names and qualifications of any replacement personnel; and must be provided at least 30 days prior to any individual's assuming a management position.
       (b) To ensure both compliance with this ORDER and the retention of qualified management for the Bank, the board of directors shall, within 60 days from the effective date of this ORDER, develop a written analysis and assessment of the Bank's management and staffing requirements ("Management policy"), which shall, at a minimum, address: (i) both the number and the type of positions needed to properly manage the Bank, (ii) a clear and concise description of the required experience and level of compensation for each such position, (iii) an evaluation of each member of the Bank's present management, (iv) a plan to recruit and hire any replacement personnel with the requisite ability and experience necessary to fill management positions at the Bank. (v) a periodic evaluation of each Bank {{4-30-93 p.C-3058}}employee's job performance, and (vi) the establishment of procedures to review periodically and update the Management Poiicy. The Management Policy and any subsequent modification thereto shall be sub mined to the Regional Director for review and comment. Within 30 days from receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall approve the Management Policy, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank and its successors and assigns shall follow the Management Policy and/or any subsequent modifications thereto.

   [.2] 2. As of the effective date of this ORDER, loans of $300,000 or more may not be made by the Bank without prior approval by the Bank's board of directors in conformity with the Bank's loan policy as revised in accordance with paragraph 12 of this ORDER.

    [.3] 3. (a) Within 30 days from the effective date of this ORDER, and concurrently with the requirements of paragraph 4 of this ORDER, the Bank shall establish and thereafter continually maintain an adequate allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income by charges against current operating income. In complying with the requirements of this paragraph 3(a) of the ORDER, the Bank's board of directors shall, at a minimum, review the adequacy of the Bank's allowance for loan and lease losses prior to the end of each calendar quarter. Such review will consider, at a minimum, loans adversely classified in the most recent report of examination of the Bank by the FDIC or the Commonwealth of Virginia, the findings of the Bank's internal review and grading procedures, the level and trend of loans overdue thirty days or mom, management policies and capabilities, collection practices, and local and general economic conditions. The minutes of the meeting of the board of directors at which such review is undertaken shall indicate the results of the review, the amount of any recommended increases in the allowance, and the basis for determining the amount of allowance provided. In complying with the requirements of this paragraph 3(a) of the ORDER, the Bank's board of directors shall require an immediate charge to current income of any deficiency balance in the Bank's reserve for loan and lease losses determined as a result of the review.
       (b) Reports of Condition and income required to be filed by the Bank prior to the effective date of this ORDER and subsequent to December 9, 1991, shall reflect a provision for the allowance for loan and lease losses necessary to comply with paragraph 3(a) of this ORDER. If necessary to comply with this paragraph 3(b) of the ORDER, the Bank shall file amended Reports of Condition and Income within thirty days from the effective date of this ORDER.

   [.4] 4. Within 30 days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection, charge-off, or other proper entries, all assets of portions of assets classified "Loss" by the FDIC as a result of the FDIC's Report of Examination of the Bank as of December 9, 1991, which have not been previously collected or charge off, unless otherwise approved in writing by the Regional Director. Reduction of these assets through the use of proceeds of loans made by the Bank does not constitute collection for the purposes of this paragraph 4 of the ORDER.

[.5] 5. (a) Within 180 days from the effective date of this ORDER, the Bank shall reduce the aggregate dollar volume of all remaining assets classified "Substandard" in the FDIC's Report of Examination of the Bank as of December 9, 1991, to not more than $4,000,000; within 360 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $3,000,000; and within 540 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $2,000,000. The requirements of this paragraph 5(a) of the ORDER shall not be construed to establish a standard for future operations of the Bank.
(b) Within 90 days from the effective date of this ORDER, the Bank shall submit to the Regional Director a written plan of action to reduce each asset which was adversely classified by the FDIC as of December 9, 1991, and which aggregated $100,000 or more as of that date. Such plan of action shall thereafter be implemented and monitored by the Bank, and {{4-30-93 p.C-3059}}progress reports thereon shall be submitted by the Bank to the Regional Director at 90-day intervals concurrently with the other reporting requirements set forth in paragraph 18 of this ORDER.
   (c) As used in this paragraph 5 of the ORDER, "reduce" means to (i) collect, (ii) charge off, or (iii) improve the quality of such assets sufficiently to warrant removal of any adverse classification by the FDIC.

[.6] 6. (a) Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, any additional 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" or "Doubtful" and is uncollected.
   (b) Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been classified, in whole or in pan, "Substandard" and is uncollected, unless, prior to the extension of credit, a majority of the Bulk's board of directors (i) determines that such advance is in the best interest of the Bank, (ii) determines that the Bank has satisfied the requirements set out in paragraph 5(b) of this ORDER as to such borrower, (iii) determines that the extension of credit is in full compliance with the Bank's loan policy, (iv) determines that all necessary loan documentation is on file, including but not limited to current financial and cash flow information and satisfactory appraisal, title and lien documents, and (v) approves such advance. A written record of the board of directors' determination and approval of any advance under this paragraph 6(b) of the ORDER shall be maintained in the credit files of the affected borrower(s) as well as in the minutes of the board of directors.
   (c) The requirements of this paragraph 6 of the ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit already extended to the borrower, provided such action is in accordance with both Federal and state laws, rules, and regulations, and further provided that all interest due at the time of such renewal or extension is collected in cash from the borrower.

[.7] 7. (a) Effective the date of this ORDER, the Bank shall not: (i) accrue interest on any loan that is, or becomes, 90 days or more delinquent in principal or interest payments unless the loan is both well secured and in the process of collection; (ii) add uncollected interest to the unpaid balance of any loan on which interest is due unless such addition is supported by additional tangible collateral which adequately and completely secures the loan; (iii) extend credit by means of a new note for uncollected interest due on any loan unless such new extension of credit is supported by additional tangible collateral which adequately and completely secures the loan; or (iv) book uncollected interest by any other means in contravention of the Instructions for the Reports of Condition and Income.
   (b) For purposes of this paragraph 7 of the ORDER, "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.

[.8] 8. (a) Within 30 days from the effective date of this ORDER, the Bank shall prepare a realistic and comprehensive budget and earnings forecast for calendar year 1993 and shall submit this budget and earnings forecast to the Regional Director for review and comment.
   (b) As long as this ORDER remains in effect, the Bank shall prepare realistic and comprehensive calendar year budgets and earnings forecasts on a consolidated basis as of January 1 of each year subsequent to 1993 and shall submit them to the Regional Director for review and comment no later than January 31 of the budget year.
   (c) In preparing the budgets and earnings forecasts required by this paragraph 8 of the ORDER, the Bank shall, at a minimum:   

       (i) identify the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance, and
       (ii) describe the operating assumptions that form the basis for, and ade- {{4-30-93 p.C-3060}}quately support, major projected income and expense components.
   (d) Progress reports comparing the Bank's actual income and expense performance with budgetary projections shall be submitted to the Regional Director concurrently with the other reporting requirements set forth in paragraph 18 of this ORDER. The Bank's board of directors shall review such progress reports, which review shall be recorded in the minutes of the board of directors.

[.9] 9. (a) Within 60 days from the effective date of this ORDER, the Bank shall establish an effective system of loan documentation and shall correct the technical exceptions on loans noted on page 2-c of the FDIC's Report of Examination of the Bank as of December 9, 1991. In addition, and as long as this ORDER remains in effect, the Bank shall obtain and evaluate all necessary loan documentation, or evidence thereof, before further credit is extended by the Bank.
   (b) Effective the date of this ORDER, the Bank shall not extend any credit, whether secured or unsecured, without first obtaining and analyzing credit information sufficient to identify the borrower's source of repayment and to support the scheduled repayment plan. In addition, the Bank shall not extend or renew any secured credit until all required collateral documentation, or evidence thereof, has been obtained and reviewed by a loan officer or by the board of directors' loan committee.

   [.10] 10. Within 30 days from the effective date of this ORDER, the Bank shall take all necessary steps, consistent with sound banking practices, to eliminate and/or correct all violations of applicable laws and regulations committed by the Bank, as described on pages 6-a through 6-a-2 of the FDIC's Report of Examination of the Bank as of December 9, 1991. In addition, the Bank shall adopt appropriate procedures to ensure its future compliance with all applicable laws and regulations.

   [.11] 11. Within sixty days from the effective date of this ORDER, the Bank shall establish and thereafter maintain a system of asset review and grading, which shall identify specific assets and/or groups of assets that warrant the special attention of management. For each asset or group of assets identified, the system shall provide a statement or indication of the reason(s) why such assets merit special attention, and provide a mechanism for reporting periodically to the board of directors concerning the status of each identified asset or group of assets, and the action(s) taken by management. In complying with this requirement, the Bank shall apply a grading system to indicate the degree to which the quality of the asset(s) is impaired. The Rank shall consider, at a minimum, assets adversely classified in the most recent FDIC or Commonwealth of Virginia report of examination of the Bank, all overdue and nonaccrual assets, nonearning assets acquired through collection efforts, and any other asset or group of assets which require more than a normal degree of supervision.

[.12] 12. (a) Within sixty days from the effective date of this ORDER, the Bank shall review and revise its written loan policy and submit the revised loan policy to the Regional Director for review. Within thirty days of such review, the board of directors shall consider any changes requested by the Regional Director and shall approve the revised written loan policy and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank shall implement and follow the revised written loan policy and/or any subsequent modification thereto.
   (b) In complying with the requirements of paragraph 12(a) of the ORDER, the Bank's written loan policy, as revised, shall include, but not necessarily be limited to, the recommendations contained on pages 6-1 and 6-2 of the FDIC's Report of Examination of the Bank as of December 9, 1991.

[.13] 13. (a) Within sixty days from the effective date of this ORDER, the Bank shall review and revise its written investment policy, and submit the revised investment policy to the Regional Director for review. Within thirty days of such review, the Bank's board of directors shall consider any changes requested by the Regional Director and shall approve the revised written investment policy and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank shall implement and follow the revised {{1-31-97 p.C-3061}written investment policy and/or any subsequent modifications thereto.
   (b) In complying with the requirements of paragraph 13(a) of the ORDER, the Bank's written investment policy, as revised, shall include, but not necessarily be limited to, the recommendations contained on page 6-2 of the FDIC's Report of Examination of the Bank as of December 9, 1991.

[.14] 14. (a) Within sixty days from the effective date of this ORDER, the Bank shall formulate a written asset/liability and funds management policy, and submit the proposed asset/liability and funds management policy to the Regional Director for review. Within thirty days of such review the Bank's board of directors shall consider any changes requested by the Regional Director and shall approve the written asset/liability and funds management policy and/or any subsequent modifications thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank shall implement and follow the written asset/liability and funds management policy and/or any subsequent modification thereto.
   (b) In complying with the requirements of paragraph 14 (a) of the ORDER the Bank's written asset/liability and funds management policy shall include, but not necessarily be limited to, the recommendations contained on page 4-2 of the FDIC's Report of Examination of the Bank as of December 9, 1991.

[.15] 15. (a) Within 90 days from the effective date of this ORDER, the Bank shall undertake a review of the Bank's internal and external audit programs, and revise such programs to effect conformance with the FDIC Statements of Policy entitled "STATEMENT OF POLICY REGARDING INDEPENDENT EXTERNAL AUDITING PROGRAMS OF STATE NONMEMBER BANKS", 53 Fed. Reg. 47,871 (November 28, 1988), and "STATEMENT OF POLICY PROVIDING GUIDANCE ON EXTERNAL AUDITING PROCEDURES FOR STATE NONMEMBER BANKS", 55 Fed. Reg. 2145 (January 22, 1990). Within thirty days of such review, the audit programs, as revised and any subsequent modifications thereto, shall be approved by the Bank's, board of directors, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank shall implement and follow the revised audit programs and/or any subsequent modifications thereto.
   (b) In complying with the requirements of paragraph 15(a) of this ORDER, the board of directors shall, at a minimum. provide for an audit committee, whose members shall not be actively involved in the daily management of the Bank's affairs. At a minimum, such committee shall be provided specific written authority to establish and define the scope of the internal and external audit programs, to direct and monitor the effectiveness of such programs, and to take any actions necessary to maintain the independence of the personnel responsible for implementing and/or performing tasks required by such programs.

   [.16] 16. Upon the effective date of this ORDER, the board of directors and all committees thereof shall maintain complete and accurate minutes and other records of all meetings, to include at a minimum, agendas, the content of all discussions, and a record of all actions taken during such meetings. In complying with this paragraph 16 of the ORDER, the board of directors and all committees thereof shall maintain in their records all reports and requests for action submitted by subordinate committees or Bank officers, copies of all records included as a portion of or appendix to the agenda or reviewed by the board of directors or committees thereof, and secretaries' reports that include specific details regarding information presented discussion, and action taken concerning all items brought before the board of directors or committees thereof. The board of directors shall designate, for its meetings and meetings of all committees thereof, a competent secretary who shall be responsible for maintaining such records of meetings.

   [.17] 17. 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 also (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe this ORDER in all material respects. The description add any accompanying communication, statement, or notice shall be sent to the FDIC's Registration and {{1-31-97 p.C-3062}}Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429, for review at least 20 days prior to dissemination to shareholders. Any changes requested by the FDlC shall be made prior to dissemination of the communication, notice, or statement.
   18. Within 90 days from the effective date of this ORDER, and within 30 days after the end of each calendar quarter thereafter while this ORDER remains in effect, the Bank shall furnish written progress reports to the Regional Director 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 has released the Bank in writing from making further reports. 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 appropriate board meetings.
   19. The provisions of this ORDER shall become effective ten (10) days from the date of its issuance and shall be binding upon the Bank, its institution-affiliated parties, and its successors and assigns. Further, 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.
   Done at Atlanta, Georgia, this 25 day of February, 1993.
   Pursuant to delegated authority.

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