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FDIC Enforcement Decisions and Orders

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[11,284] In the Matter of Interstate Bank, Wakeeney, Kansas, Docket No. FDIC-96-063b (4-26-96)

   Bank to cease and desist from such unsafe or unsound practices as engaging in management policies and practices which are detrimental to the bank; engaging in practices which produce inadequate operating income; failing to provide adequate supervision and direction over the affairs of the bank to prevent unsafe or unsound practices; failing to establish and/or implement an adequate system of internal procedures and controls and external audits; and failing to submit reports of condition and income in accordance with prevailing instructions.

   [.1] Management—Qualifications Specified
   [.2] Management—Management Plan Required
   [.3] Reports of Condition and Income—Complete in Accordance with Instructions
   [.4] Capital—Tier 1 Capital—Increase
   [.5] Profit Plan—Preparation Required
   [.6] Dividends—Restricted
   [.7] Audit—Independent Opinion Audit Required
   [.8] Audit—External Audit, Minimum Procedures
   [.9] Audit—Internal Audit, Minimum Procedures Specified
   [.10] Data Processing—Change in Processor or Software—FDIC Approval Required
   [.11] Shareholders—Disclosure—Cease and Desist Order
   [.12] Cease and Desist Orders—Compliance Reports

In the Matter of

INTERSTATE BANK
WAKEENEY, KANSAS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-96-063b

   Interstate Bank, Wakeeney, Kansas ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe and 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 ("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 April 23, 1996, 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.
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   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. engaging in management policies and practices which are detrimental to the Bank;
   B. engaging in practices which produce inadequate operating income;
   C. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices;
   D. failing to establish and/or implement an adequate system of internal procedures and controls and external audits; and
   E. 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 30 days from the effective date of this ORDER, the Bank shall have and thereafter retain qualified management. Such management shall include a chief executive officer, and a cashier/chief financial officer who shall be given stated written authority by the Bank's board of directors. The cashier/chief financial officer shall have the authority and responsibility for implementing and maintaining the Bank's internal procedures and controls, accounting practices, recordkeeping and electronic data processing. The chief executive officer and the cashier/chief financial officer shall have an appropriate level of 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 FDIC's Kansas City Regional Office ("Regional Director") and the Kansas State Bank Commissioner ("Commissioner") of the identity of said chief executive officer and cashier/chief financial officer. 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 of the Act, 12 U.S.C. § 18311, 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, internal procedures and controls, or liquidity.

   [.2] (b) No more than 60 days from the effective date of this ORDER, the board of directors shall develop a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:
       (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank;
       (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
       (iii) evaluation of each Bank officer, and in particular the chief executive officer, and staff member to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and
       (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the board of directors determines are necessary to fill Bank officer or staff member positions consistent with the board's analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
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       (c) The written management plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days from the receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall approve the written management plan and/or any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall implement and follow the written management plan and/or any subsequent modification.

   [.3] 2. The Bank shall complete Reports of Condition and Income in accordance with the requirements of the Instructions for Preparation of Reports of Condition and Income ("Instructions").

   [.4] 3. (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(t) of the FDIC's Rules and Regulations, 12 C.F.R. § 325.2(t).
       (ii) "Noncumulative perpetual preferred stock" means the same as the term in section 325.2(o) of the FDIC's Rules and Regulations, 12 C.F.R. § 325.2(o).
       (iii) "Total assets" means the same as the term in section 325.2(v) of the FDIC's Rules and Regulations, 12 C.F.R. § 325.2(v).
       (iv) "Securities" means common and noncumulative perpetual preferred stock.
   (b) Effective the date of this ORDER, 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 the effective date of this ORDER, for purposes of calculating Tier 1 capital ratio, Tier 1 capital and total assets shall be the dollar amount reported in the Bank's most recent Report of Condition and Income.
   (c) 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 and the Commissioner 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 approval plan and shall thereafter maintain its Tier 1 capital ratio at or in excess of such level while this ORDER is in effect.
   (d) 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 3(b) and 3(c) of this ORDER.
   (e) 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 3(b) and 3(c) of this ORDER. For the purpose of this paragraph (e), the diminution in the value of stock held by any director as the result of the sale of new offerings of common stock or noncumulative perpetual preferred stock to increase the Bank's Tier 1 capital shall not be considered to be a utilization of such director's personal assets.

[.5] 4. (a) No more than 90 days from the effective date of this ORDER, the Bank shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:

       (i) identification of the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (b) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the {{6-30-96 p.C-4194}}Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan and any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written profit plan and/or any subsequent modification thereto.

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

   [.7] 6. No more than 30 days from the effective date of this ORDER, the Bank shall engage a qualified independent auditor to perform an opinion audit of the Bank, which audit shall be completed no more than 180 days from the effective date of this ORDER.

       [.8] 7. (a) No more than 90 days from the effective date of this ORDER, the Bank shall finalize and implement a written external audit program in accordance with the FDIC's Statement of Policy Regarding Independent External Auditing Programs of State Nonmember Banks, 2 FDIC Law, Regulations, Related Acts (FDIC) 5299, and the FDIC's Statement of Policy Providing Guidance on External Auditing Procedures for State Nonmember Banks, 2 FDIC Law, Regulations, Related Acts (FDIC) 5302.01. The written auditing procedures shall at a minimum provide that the Bank:
         (i) follow the "Basic External Auditing Procedures" prescribed under the headings "Loans," "Allowance for Loan Losses," "Insider Transactions," "Internal Controls," and "Electronic Data Processing Controls" in the FDIC's Statement of Policy Providing Guidance on External Auditing Procedures for State Nonmember Banks; and
         (ii) have an audit of the Bank performed by a qualified independent auditor at least annually beginning in the calendar year 1997 in accordance with the Bank's written auditing procedures.
       (b) The written auditing procedures and any subsequent modifications thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days from the receipt of comment from the Regional Director, the board of directors shall approve the written auditing procedures and any subsequent modifications thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written auditing procedures and/or any subsequent modification thereto.

   [.9] 8. No more than 90 days from the effective date of this ORDER, the Bank shall develop and implement an internal audit and control program providing adequate internal procedures and controls, accounting practices, electronic data processing and recordkeeping. In addition, the Bank shall take the following action immediately:
    (a) (i) General ledger and subsidiary records shall be maintained and filed in an orderly manner. All pertinent transactions shall be posted to the general ledger and appropriate subsidiary ledger not later than the close of business of the next succeeding banking day following completion of such transaction. For purposes of this ORDER: (A) a "banking day" is any day on which the Bank is open to the public for carrying on substantially all of its banking functions; and (B) Monday is the next succeeding banking day following Friday. Such postings shall be in sufficient detail as to permit identification and tracing of each transaction; and
       (ii) Close out all unlocated differences in all departments daily through the general ledger.
   (b) Reconcile on the day received each computer trail balance and work processed. Appropriate entries shall be made immediately to correct errors found as a result of such reconciliations.
   (c) Develop a system of control for a separation of duties whereby one individual does not control a transaction from inception to termination.
   (d) Provide a system whereby each employee's work is reviewed by his/her supervisor or another qualified employee.
   (e) Initiate a program of rotation of duties to provide for the cross training of employees.

   [.10] 9. The Bank shall not transfer the electronic processing of its data to another processor, or change its electronic data processing software, without the prior written {{7-31-96 p.C-4195}}consent of the Regional Director and the Commissioner.

   [.11] 10. 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 description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and 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 to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.

   [.12] 11. The Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results within 60 days of the effective date of this ORDER. Thereafter, the Bank shall furnish such reports on request of either the Regional Director or the 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 institutionaffiliated 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.
   Dated this 26th day of April, 1996.
   Pursuant to delegated authority.

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