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FDIC Enforcement Decisions and Orders

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{{6-30-94 p.C-3319}}
   [10,847] In the Matter of Community Bank of Greater Peoria, East Peoria, Illinois, Docket No. FDIC-93-157b (7-19-93).

   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 in violation of applicable laws or regulations; following hazardous lending and lax collection practices; operating with an immoderate level of adversely classified assets; operating with inadequate liquidity; operating with inadequate provisions for funds management; operating with inadequate allowance for loan and lease losses; operating without adequate reserve for loan losses; overstating earnings and filing inaccurate Reports of Condition and Income; operating with inadequate capital; and {{6-30-94 p.C-3320}}operating the trust department in such a manner as to create the appearance of conflicts of interest between the bank and individual accounts. (This order was terminated by order of the FDIC dated 4-8-94; see ¶ 15,849.)

   [.1] Management—Qualifications—Review
   [.2] Violations of Law—Eliminate/Correct
   [.3] Loans and Extensions of Credit—To Bank Affiliates—Reduction Plan
   [.4] Assets—Adversely Classified–Eliminate/Reduce
   [.5] Loans—Risk Position—Reduce—Written Plans Required
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Loans—Concentrations of Credit—Reduction Plan
   [.8] Allowance for Loan and Lease Losses—Establish/Maintain
   [.9] Profit Plan—Minimum Requirements
   [.10] Loan Policy—Written Revision—Minimum Requirements
   [.11] Liquidity—Written Policy—Minimum Requirements
   [.12] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.13] Dividends—Restricted
   [.14] Trust Policy—Written Revision Required
   [.15] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.16] Contingent Liabilities—Report Required
   [.17] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

COMMUNITY BANK OF GREATER
PEORIA

EAST PEORIA,
ILLINOIS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-93-157b

   The Community Bank of Greater Peoria, East Peoria, Illinois ("Bank") having been advised of its rights to a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices and violations of law or 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 OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated July 16, 1993, 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 or 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 believe that the Bank had engaged in unsafe and unsound banking practices and had violated laws or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, the Bank's 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 or regulation:
   A. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management of the Bank.
   B. Operating with management whose policies and practices are detrimental to the Bank and which jeopardize the safety of its deposits.
{{9-30-93 p.C-3321}}
   C. Violating laws or regulations, including:
   1. The State of Illinois legal lending limit restrictions as set forth in section 32 of the Illinois Banking Act, ILL. REV. STAT. ch. 17, para. 339.
   2. The aggregate lending limit restrictions of section 215.4(c) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. § 215.4(c).
   3. The due and payable term requirement of section 215.5(d)(4) of Regulation O, 12 C.F.R. § 215.5(d)(4).
   4. The lending limit restrictions of section 23A of the Federal Reserve Act ("Section 23A"), 12 U.S.C. § 371c(a)(1)(A) and (B).P    5. Section 323.4 of the FDIC Rules and Regulations, 12 C.F.R. § 323.4.
   6. Section 337.3(b) of the FDIC Rules and Regulations, 12 C.F.R. § 337.3(b).P    D. Engaging in hazardous lending and lax collection practices, including, but not limited to the following:
   —The failure to incorporate limitations and controls over customer overdrafts into the Bank's loan policy;
   —The failure to obtain adequate collateral;
   —The failure to reduce concentrations of credit to a level which reflects an acceptable degree of risk;E    —The failure to obtain proper loan documentation;
   —The failure to establish and monitor collateral margins of secured borrowers;
   —The failure to establish and enforce adequate loan repayment programs;
   —The failure to timely reflect letters of credit issued by the Bank on the Bank's books; and
   —The failure to obtain current and complete financial information.
   E. Operating with an immoderate level of adversely classified and nonaccrual loans, as well as the failure to limit net loan losses.
   F. Operating with marginal liquidity in light of the Bank's asset and liability mix.
   G. Operating with an inadequate funds management policy.
   H. Operating with an inadequate allowance for loans and lease losses for the volume, kind, and quality of loans and leases held.
   I. The failure to make provision for an adequate reserve for possible loan losses.
   J. Overstating the Bank's earnings and the resultant filing of inaccurate FDIC Reports of Income and Condition.
   K. Operating with a marginal level of equity capital protection for the kind and quality of assets held.
   L. Operating the trust department in such a manner that creates the appearance of conflicts of interest between individual trust accounts and the Bank.
   IT IS FURTHER ORDERED, that the Bank, the Bank's institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

[.1] 1. (a) Within 30 days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include: (1) a new chief executive officer with proven ability in managing a bank of comparable size and experience in upgrading a low quality loan portfolio; and (2) a senior lending officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Bank's loan portfolio. 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, capital adequacy, earnings, management effectiveness, and liquidity.
   (b) During the life of this ORDER, the Bank shall notify the Regional Director of the Chicago Regional Office of the FDIC ("Regional Director") in writing of any changes in any of the Bank's management. For purpose of this ORDER, "management" is defined as members of the board of directors and "senior executive officers," as that term is defined in section 32 of the Act ("section 32"), 12 U.S.C. § 1831(i), and section 303.14 of the FDIC Rules and Regulations ("sect- {{9-30-93 p.C-3322}}ion 303.14"), 12 C.F.R. § 303.14. Prior to the addition of any individual to the board of directors or the employment of any individual as a senior executive officer, the Bank shall comply with the requirements of section 32 and section 303.14.

[.2] 2. (a) Within 30 days from the effective date of this ORDER, the board of directors shall formulate and submit to the Regional Director for review, comment and approval a written plan for the elimination and/or correction of all violations of law and/or regulation listed on pages 6-2 through 6-6 of the FDIC Report of Examination as of November 13, 1992 ("FDIC Report") and all other violations of law and/or regulation existing as of the effective date of the ORDER.
(b) Within 30 days from receipt of approval from the Regional Director, and after adoption of any adjustments to the plan required by the Regional Director, the board of directors shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. The board of directors shall immediately thereafter instruct Bank management to implement the plan of elimination and/or correction of such violations.

[.3] 3. (a) Within 90 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director for review and comment a written plan to reduce the amount of loans and other extensions of credit advance to Bank affiliates identified on page 6-3 of the FDIC Report. Such plan shall include, but not be limited to, the following:

       (i) Dollar levels to which the Bank shall reduce each extension of credit within 6 and 12 months from the effective date of this ORDER; and
       (ii) Provisions for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors.
   (b) Within 30 days from receipt of any comment from the Regional Director, and after the adoption of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow this plan.

[.4] 4. As of 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" as of November 13, 1992, that have not been previously collected or charged off. Any such charged-off asset shall not be rebooked without the prior written consent of the Regional Director. Elimination or reduction of these assets with the proceeds of other Bank extensions of credit is not considered collection for the purpose of this paragraph.

[.5] 5. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director for review and comment, a written plan to reduce the Bank's risk position in each asset in excess of $100,000 which is classified "Substandard" in the FDIC Report. In developing such plan, the Bank shall, at a minimum:

       (i) Review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) Evaluate and available collateral for each such credit, including possible actions to improve the Bank's collateral position.
   (b) Such plan shall include, but not be limited to, the following:
       (i) Dollar levels to which the Bank shall reduce each asset within 6 and 12 months from the effective date of this ORDER; and
       (ii) Provisions for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors.
   (c) 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 of any adverse classification by the FDIC.
   (d) Within 30 days from the receipt of any comment from the Regional Director, and after adoption of any recommended changes, the Bank shall approve the written plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow this written plan.

   [.6] 6. As of the effective date 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 {{9-30-93 p.C-3323}}other credit has been classified "Substandard" or "Loss," and is uncollected unless the Bank's board of directors has adopted, prior to such extension of credit, a detailed written statement giving the reasons why such extension of credit is in the best interest of the Bank. A copy of the statement shall be placed in the appropriate loan file and shall be incorporated in the minutes of applicable board of directors' meeting. The requirements of this paragraph do not prohibit the Bank from renewing any credit already extended to the borrower, upon collection of interest in cash from the borrower and the acquisition of appropriate documentation, including current financial data, to accurately analyze the reasonableness of the extension.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director for review and comment, a written plan to reduce each of the loan concentrations of credit identified on pages 2-c-1 through 2-c-3 of the FDIC Report as follows: (a) Out-of-territory concentration to less than 100 percent of the Bank's Tier 1 capital accounts; (b) Nursing Home/Retirement Center concentration to less than 100 percent of the Bank's Tier 1 capital accounts; (c) Interrelated group or single repayment source concentrations to less than 25 percent of the Bank's Tier 1 capital accounts. Such plan shall prohibit any additional advances that would increase the concentrations or create new concentrations and shall include but not be limited to, the following:

       (a) Dollar levels to which the Bank shall reduce each concentration 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 minutes of the meetings of the board of directors.
       (c) Within 30 days from receipt of any comment from the Regional Director, and after adoption of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank shall implement and follow the plan.

[.8] 8. (a) Within 10 days from the effective date of this ORDER, the Bank shall replenish its allowance for loan and lease losses ("ALLL") 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 an additional provision for loan and lease losses which, after review and consideration by the board of directors, reflects the potential for further losses in the remaining loans or leases classified "Substandard" and all other loans and leases in its portfolio. In making this determination, the board of directors shall consider all nonperforming and nonaccrual loans.
   (c) Within 90 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to November 13, 1992, shall be amended and refiled if they do not reflect a provision for loan and lease losses and an ALLL which are adequate considering the condition of the Bank's loan portfolio, and which, at a minimum, incorporate the adjustments required by the above subparagraphs of this ORDER.
   (d) Prior to submission or publication of all Reports of Condition and Income required by the FDIC after the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's ALLL and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the finding of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of ALLL provided.

[.9] 9. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director for review and comment, a written profit plan and realistic, comprehensive budgets for all categories of income and expense for calendar years 1993 and 1994. The plan required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the Bank's overall earnings, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components.
   (b) The written profit plan shall ad- {{9-30-93 p.C-3324}}dress, at a minimum, the provisions for loan loss expense needed to maintain an adequate ALLL.
   (c) At the end of each calendar quarter, the Bank's board of directors shall evaluate the Bank's actual performance in relation to the plan and budget required by this paragraph and record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors' meeting at which such evaluation is undertaken. Any adjustments resulting from such evaluation shall be reflected in the appropriate prior quarter call reports.

[.10] 10. (a) Within 90 days from the effective date of this ORDER, the annually thereafter, the board of directors of the Bank shall review the Bank's loan policy and procedures for adequacy and, based upon this review, shall make all appropriate revisions to the policy necessary to strengthen lending procedures and abate additional loan deterioration. The revised written loan policy and any subsequent modifications shall be submitted to the Regional Director for review and comment upon their completion.
   (b) The initial revisions to the Bank's loan policy required by this paragraph, at a minimum, shall include a provision requiring overdrafts that total $1,000 or more, or which have been outstanding for over 5 business days, to be specifically presented to the board of directors for review, comment and approval. Said presentation shall be made on an individual account basis and shall include the reasons for the overdraft, the manner of proposed correction and identification of the approving officer.
   (c) Within 30 days from the receipt of any comments from the Regional Director and after the adoption of any recommended changes, the board of directors shall approve the written loan policy and any subsequent modification thereto, which approvals shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow the written loan policy and any subsequent modifications thereto.

[.11] 11. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director for review and comment, a written plan addressing liquidity and rate sensitivity objectives. Annually thereafter during the life of this ORDER, the Bank shall review this plan for adequacy and, based upon such review, shall make appropriate revisions in the plan that are necessary to strengthen funds management procedures and maintain adequate provisions to meet the Bank's liquidity needs. A copy of the revised plan shall also be submitted to the Regional Director upon its completion. The revised plan shall include, at a minimum, provisions:

       (i) Requiring maintenance of a liquidity ratio at a level commensurate with the Bank's operations and funding requirements. The liquidity ratio shall be computed in the same manner as used by the FDIC in the FDIC Report;
       (ii) Limiting the Bank's ratio of total loans to total deposits to a level consistent with prudent banking practices;
       (iii) Establishing a desirable range for the volatile liability dependency ratio as computed by the FDIC in the FDIC Report;
       (iv) Requiring that monthly calculations of the liquidity and dependency ratios, following the format utilized in regulatory reports of examination, be provided to the board of directors for review, with such review noted in the board minutes; and
       (v) Establishing an acceptable range for the relationship between rate sensitive assets and rate sensitive liabilities.
   (b) Within 30 days from the receipt of all such comments from the Regional Director, and after the adoption of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow the plan.

[.12] 12. (a) Within 30 days from the last day of each calendar quarter following the effective date of this ORDER, the Bank shall determine from its Report of Condition and Income its level of Tier 1 capital as a percentage of its total assets ("capital ratio") for that calendar quarter. If the capital ratio is less than 7.0 percent, the Bank shall, within 60 days of the date of the required determination, increase its capital ratio to not less than 7.0 percent calculated as of the end of that preceding quarterly period. For purposes of this ORDER, Tier 1 capital and total assets shall {{9-30-93 p.C-3325}}be calculated in accordance with Part 325 of the FDIC Rules and Regulations ("Part 325"), 12 C.F.R. Part 325.
   (b) Any such increase in Tier 1 capital may be accomplished by the following:

       (i) The sale of common stock and noncumulative perpetual preferred stock constituting Tier 1 capital under Part 325; or
       (ii) The elimination of all or part of the assets classified "Loss" and "one-half of Doubtful" as of November 13, 1992 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 this ORDER; or
       (iii) The collection in cash of assets previously charged off; or
       (iv) The direct contribution of cash by the directors and/or the shareholders of the Bank or its holding company; or
       (v) Any other means acceptable to the Regional Director; or
       (vi) Any combination of the above means.
   (c) 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 adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held by or controlled by them in favor of said plan. Should the implementation of the plan involve 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 materials used in the sale of the securities shall be submitted to the FDIC at Washington, D.C., for its review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (d) In complying with the provisions of paragraph 13(c) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of 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 Bank securities. The written notice required by this paragraph shall be furnished within 10 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's original offering materials.
   (e) The capital ratio analysis 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.

   [.13] 13. As of the effective date of this ORDER, the Bank shall pay no cash dividends which would result in a Tier 1 capital ratio of less than 7.0 percent, without the prior written consent of the Regional Director.

   [.14] 14. Within 90 days from the effective date of this ORDER, the Bank shall revise its trust policy. The revised policy shall address the avoidance of conflicts of interest and shall require adequate documentation for trust inter-account transactions, including the accounts of Bank officers and directors and their related interests as that term is defined in section 215.2(m) of Regulation O, 12 C.F.R. § 215.2(m).

   [.15] 15. Within 10 days from the effective date of this ORDER, the Bank shall establish a compliance committee comprised of at least 5 directors who are not officers or principal shareholders of the Bank, as those terms are defined in section 215.2(d) and (1) of Regulation O, 12 C.F.R. §§ 215.2(d) and (1). The committee shall monitor compliance with this ORDER, and, within 30 days from the effective date of this ORDER, and every 30 days thereafter, shall submit to the board of directors for consideration at its regular monthly meetings a written report detailing the Bank's {{9-30-93 p.C-3326}}compliance with this ORDER. The compliance report shall be incorporated in the minutes of the board of directors' meeting. Establishment of this committee does not in any way diminish the responsibility of the entire board of directors for ensuring compliance with the provisions of this ORDER.

    [.16] 16. (a) Upon the effective date of this ORDER, the board of directors shall direct Bank management to ascertain (through all available means, including requests for disclosure from all parties to the transactions) the total dollar amount of Bank liabilities, including letters of credit or other contingent liabilities issued by the Bank, but never reflected on the books of the Bank. In addition thereto, Bank management shall identify the parties to whom and on whose behalf said letters of credit were issued, as well as the beneficiaries and extent of the Bank's exposure thereunder. The board of directors shall instruct Bank management to take all action appropriate to reduce the Bank's liability for said items or otherwise protect the Bank's position, including, but not limited to making demand for appropriate collateral and guarantees, as well as declining to renew expiring letters of credit. Upon receipt of Bank management's findings, the board of directors shall immediately present both preliminary and any necessary recurring reports concerning the letters of credit or other contingent liabilities to the Regional Director.
    (b) Within 30 days from the effective date of this ORDER, the board of directors shall formulate and submit to the Regional Director for review and comment a policy for the Bank's issuance of letters of credit. At a minimum, this policy shall include procedures which would prevent any officer, director, employee, principal shareholder or other individual from issuing letters of credit in the name of the Bank without adherence to the procedures to be established, including obtaining the requisite approvals, compliance with a prenumbering system, and the timely reflection of all letter of credits on the Bank's books. Within ten days from the date of receipt of any comments from the Regional Director and after consideration of all such comments, the board of directors shall approve and implement the policy. This approval shall be recorded in the minutes of the Bank's board of directors' meeting.

   [.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 (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, 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.
   18. On the last day of the first month following the date of issuance of this ORDER, and on the last day of every third month thereafter, the Bank shall furnish to the Regional 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 this ORDER. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has, in writing, released the Bank from making further reports.
   The effective date of this ORDER shall be 10 days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Bank, the Bank's institution-affiliated parties, and any successors and assigns thereof.
   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.
   Dated: July 19, 1993.
   Pursuant to delegated authority.

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