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FDIC Enforcement Decisions and Orders

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   [11,538] In the Matter of Victory State Bank, Columbia, South Carolina, Docket No. 98-042b (7-8-98)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 12-13-99; see ¶16,246.)
   [.1] Management—Qualifications Specified
   [.2] Compensation—Review and Plan Required
   [.3] Budget and Earning Forecast—Preparation Required
   [.4] Assets—Adversely Classified Assets—Reduction Required
   [.5] Loans—Extensions of Credit—Curtail to Existing Borrowers
   [.6] Loans—Overdue Ratio, Reduction Required
   [.7] Loan Loss Reserve-Establishment of or Increase Required
   [.8] Loan—Preparation or Revision of Policy Required

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   [.9] Loans—Internal Review Procedure
   [.10] Capital—Increase Required
   [.11] Violations of Law—Correction of Violations Required
   [.12] Payments—Restricted
   [.13] Shareholders-Disclosure of Cease and Desist Order Required

In the Matter of

VICTORY STATE BANK
COLUMBIA,SOUTH CAROLINA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-98-042b

   The Victory State Bank, Columbia, South Carolina ("Bank"), having been advised of its right to receive a WRITTEN NOTICE OF CHARGES AND OF HEARING ("NOTICE") detailing unsafe or unsound banking practices and violations of applicable laws and regulations alleged to have been committed by the Bank and 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 those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with a representative of the Legal Division of the Federal Deposit Insurance Corporation ("FDIC"), dated June 30, 1998, whereby solely for the purpose of this proceeding and without admitting or denying any of the alleged charges of unsafe or unsound banking practices and violations of applicable laws and 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 committed violations of applicable laws and regulations.
   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 such term is defined in section 3(u) of the Act, 12 U.S.C. § 1313(u), and its successors and assigns cease and desist from the following unsafe or unsound banking practices and 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 practices are detrimental to the Bank and jeopardize the safety of its deposits;
       C. Operating the Bank with an excessive volume of adversely classified assets and overdue loans;
       D. Engaging in hazardous lending practices, including but not limited to (i) failing to implement the Bank's loan policy; (ii) extending credit to borrowers who lack sufficient repayment ability; (iii) extending credit without properly evaluating collateral protection; and (iv) extending credit with deficient or inadequate supporting loan documentation.
       E. 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;
       F. Incurring excessive overhead expenses that have caused the Bank to sustain operating losses;
       G. Engaging in violations of applicable Federal and state laws and regulations, as more fully described on pages 28 and 29 of the FDIC's Report of Examination of the Bank as of February 12, 1998 ("ROE"); and
   IT IS FURTHER ORDERED that the Bank, its institution affiliated parties, and its successors and assigns take affirmative action as follows:

   [.1] 1. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include a qualified chief executive officer with proven ability in managing a bank of comparable size and with comparable asset problems, {{9-30-98 p.C-4574}}and senior lending personnel with proven ability in managing a loan portfolio of comparable size and with an appropriate level of lending, collection and loan supervision experience necessary to supervise the upgrading of a low quality loan portfolio. Such management shall be provided the necessary written authority to implement the provisions of this ORDER.
   (b) 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 capital adequacy, asset quality, management effectiveness and earnings. As long as this ORDER remains in effect, the Bank shall notify the Regional Director of the FDIC's Atlanta Regional office ("Regional Directors) and the South Carolina Commissioner of Banking ("Commissioner") in writing of any 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 thirty (30) days before the individual assumes the new position.

   [.2] 2. (a) Within sixty (60) days from the effective date of this ORDER, the Bank's board of directors shall review all salaries, bonuses, stipends, fees or other means of compensation paid directly or indirectly to and/or for the benefit of any director or officer to ensure that such payments constitute reasonable compensation for services performed, or to be performed, for and/or on behalf of the Bank. A written report of the board of directors, findings, including a plan to correct and/or adjust any insupportable type or amount of compensation, shall be sent to the Regional Director and the Commissioner for review and comment. Within thirty (30) days after the receipt of any comment from the Regional Director or the Commissioner, the board of directors shall approve the written report 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 report and/or any subsequent modification thereto.
   (b) Beginning July 1, 1998, and as long as this order remains in effect, the Bank shall not compensate Timothy R. McConnell in an amount exceeding a total annual compensation of $100,000.00. For purposes of this Order, the term "compensation" shall have the same meaning as set forth in section I.B.3 of Appendix A to Part 364 of the FDIC Rules and Regulations ("Rules"), 12 C.F.R. Part 364. As long as this order remains in effect, any bonus or other increase in the compensation of Mr. McConnell over and above the aforementioned total annual compensation of $100,000.00 must be approved in advance, in writing by the Regional Director and the Commissioner.

   [.3] 3. (a) As long as this ORDER remains in effect, the Bank shall prepare annually realistic and comprehensive calendar year budget and earnings forecasts on a consolidated basis as of January 1 of each year subsequent to 1998 and shall submit these budget and earnings forecasts to the Regional Director and the Commissioner for review and comment no later than January 31 of each year.
   (b) In preparing the budget and earnings forecasts required by this paragraph 3 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 adequately support, major projected income and expense components.
   (c) Progress reports comparing the Bank's actual income and expense performance with budgetary projections shall be submitted to the Regional Director and the Commissioner concurrently with the other reporting requirements set forth in 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.

   [.4] 4. (a) Within thirty (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 or portions of assets classified "Loss" by the FDIC in its Report of Examination of the Bank as of February 12, 1998, which have not been previously collected or charged off, unless otherwise approved in writing by the Regional Director and the Commissioner.

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   (b) Within ninety (90) days of the effective date of this ORDER the Bank shall reduce all assets classified "Substandard" and "Doubtful" by the FDIC in its Report of Examination of the Bank as of February 12, 1998, to not more than $900,000;
   (c) Within ninety (90) days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner a written plan of action to reduce each line of credit which was adversely classified by the FDIC as of February 12, 1998, and which aggregated fifty thousand dollars ($50,000) or more as of that date. Such plan of action shall thereafter be implemented by the Bank and monitored, and progress reports shall be submitted by the Bank to the Regional Director and the Commissioner concurrently with the other reporting requirements set forth in this ORDER.
   (d) As used in this paragraph 4 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.

   [.5] 5. (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," "Doubtful" or "Substandard" and is uncollected, except as provided in paragraph 5(b) of this ORDER.
   (b) Upon compliance by the Bank with the requirements of paragraph 4 of this ORDER, the Bank may extend additional credit, directly or indirectly, 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 part, "Substandard," and is uncollected, provided that a majority of the Bank's board of directors first (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 4 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 5(b) of the ORDER shall be maintained in the credit files of each affected borrower as well as in the minutes of the board of directors.
   (c) The requirements of this paragraph 5 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.

   [.6] 6. Within thirty (30) days of the effective date of this ORDER, the Bank shall develop and submit to the Regional Director and the Commissioner a plan to reduce the Bank's loan delinquency ratio. The plan will also include procedures for monitoring and servicing past due loans, review procedures for past due debt over $5,000 and clearly defined collection procedures that conform to the Bank's loan policy.

   [.7] 7. (a) Within sixty (60) days of the effective date of this ORDER the Bank shall establish and thereafter continuously 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 7(a) of the ORDER, the Bank's board of directors shall, at a minimum, meet and review the adequacy of the Bank's allowance for loan and lease losses prior to the end of each calendar quarter. The review shall include consideration of loans internally classified during the Bank's loan review process, loans adversely classified at FDIC and State of South Carolina Commissioner of Banking examinations of the Bank, and delinquent non-performing loans. The minutes of the board meeting 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.
   (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 31, 1996 shall reflect a provision for the allowance for loan and lease losses necessary to comply with paragraph {{9-30-98 p.C-4576}}7(a) of this ORDER. If necessary to comply with this paragraph 7(b) of the ORDER, the Bank shall file amended Reports of Condition and Income within thirty (30) days from the effective date of this ORDER.
   8. Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall take all necessary steps to correct the cited deficiencies in the "Assets with Credit Data or Collateral Documentation Exceptions" on pages 42 through 44 of the ROE. Thereafter, the Bank shall service these loans in accordance with its written loan policy and in accordance with safe and sound banking practices.

   [.8] 9. (a) Within sixty (60) days of the effective date of this ORDER, the Bank shall consolidate all existing versions of its loan policy into a single written loan policy. The Board of directors shall review and revise the Bank's loan policy and shall approve the loan policy and any revisions and record such approval in its minutes. The Bank shall submit the revisions to the loan policy to the Regional Director and the Commissioner for review and comment. At a minimum the policy shall address the recommendations set forth on pages 18 and 19 of the ROE and shall include the following elements:

       (i) Underwriting criteria addressing extensions of credit made for the purpose of debt consolidation, particularly with regard to acceptable loan to value ratios, terms and repayment sources;
       (ii) Guidance addressing any type of loan in the Bank's portfolio for which there is no underwriting criteria in the Bank's loan policy.
   (b) The Bank and its institution-affiliated parties shall implement procedures to ensure that the Bank's loan policy and all subsequent modifications to the Bank's loan policy are strictly enforced.

   [.9] 10. Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall implement an effective internal loan review and grading system to provide for the periodic review of the Bank's loan portfolio in order to identify and categorize the Bank's loans, and other extensions of credit which are carried on the Bank's books as loans, on the basis of credit quality. At a minimum, the grading system shall provide for:
   (a) The specification of standards and criteria for assessing the credit quality of the Bank's loans;
   (b) The application of the loan grading standards and criteria to the Bank's loan portfolio;
   (c) The categorization of the Bank's loans into groupings based on the varying degree of credit and other risks which may be presented under the applicable grading standards and criteria;
   (d) For any loan exhibiting credit and other risks, an assessment of the likelihood that the loan will not be repaid according to its terms and conditions;
   (e) The identification of any loan which is not in conformance with the Bank's loan policy;
   (f) The identification of any loan which presents any unsafe or unsound banking practice or condition or is otherwise in violation of any applicable Federal or state law, rule or regulation; and
   (g) The requirement for a written report to be made to the Bank's board of directors, not less than quarterly, identifying the status of those loans which exhibit credit and other risks under the applicable grading standards and criteria and the prospect of full collection or strengthening the quality of any such loans.

   [.10] 11. (a) Within thirty (30) days of the effective date of this ORDER and within thirty (30) days after each December 31 and June 30 thereafter while this ORDER remains in effect, the Bank's board of directors shall calculate the Bank's Tier 1 capital as a percentage of its total assets ("capital ratio") as of the nearest preceding December 31 or June 30 date. If such capital ratio is less than 8.0 percent, the Bank shall, within ninety (90) days from the date of such calculation, submit a capital plan to the Regional Director and the Commissioner detailing how the Bank will increase its Tier 1 capital by an amount sufficient to raise its capital ratio to not less than 8.0 percent as of the nearest preceding June 30 or December 31 date. Such increase in Tier 1 capital may be accomplished by any one or more of the following:

       (i) The sale of new securities in the form of common stock;
       (ii) The collection in cash of all or part of the assets other than loans classified "Loss" as of February 12, 1998, and {{9-30-98 p.C-4577}}charged off in accordance with paragraph 4 of this ORDER;
       (iii) The direct contribution of cash by the shareholders of the Bank;
       (iv) The collection in cash of assets other than loans previously charged off; or
       (v) Any other means acceptable to the Regional Director and the Commissioner.
   (b) If all or part of the increase in the Bank's Tier 1 capital required under paragraph 11(a) of this ORDER involves a public distribution of the Bank's securities (including a distribution limited to the Bank's existing shareholders), the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with applicable Federal securities laws. Prior to the sale of such securities, and, in any event, not less than twenty (20) days prior to the dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, 550 17th Street, NW, Washington, D.C. 20429, and to the Commissioner for review. All changes requested by the FDIC or by the Commissioner to be made in such offering materials shall be made prior to their dissemination.
   (c) In complying with the provisions of paragraph 11(b) of this ORDER, the Bank shall provide to each subscriber and to each 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 11(c) shall be furnished within ten (10) calendar days from the date that such material development or change was planned or occurred, whichever is earlier, and shall be furnished to each purchaser and to each subscriber of the Bank's securities who received or was tendered the information obtained in the Bank's original offering materials.
   (d) For purposes of this ORDER the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in sections 325.2(t) and 325.2(v), respectively, of the FDIC's Rules and Regulations, 12 C.F.R. §§ 325.2(t) and 325.2(v).
   (e) In addition to the requirements of paragraphs 11(a), 11(b) and 11(c) of this ORDER, for as long as this ORDER remains in effect, the Bank shall meet the minimum ratio requirements established for "risk based capital" as set forth in Appendix A of Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, which Appendix A is entitled "Statement of Policy on Risk Based Capital," and/or any subsequent amendments or modifications thereto.

   [.11] 12. Within ninety (90) days of the effective date of this ORDER, the Bank shall take all necessary steps, consistent with sound banking practices, to eliminate or correct all violations of law and regulations committed by the Bank, as described on pages 28 and 29 of the ROE. In addition, the Bank shall adopt appropriate procedures to ensure the Bank's future compliance with all applicable laws and regulations.

   [.12] 13. As of the effective date of this ORDER, the Bank shall not pay-any cash or property dividends without the prior written consent of the Regional Director and the Commissioner.

   [.13] 14. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER (i) in conjunction with the Bank's next shareholder communication and also (ii) 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 and any accompanying communication, statement or notice shall be sent to the FDIC, Registration and Disclosure Section, 550 17th Street, NW, Washington, D.C. 20429, and to the Commissioner, for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC or the Commissioner shall be made prior to dissemination of the description, communication, notice or statement.
   15. Within ninety (90) days from the effective date of this ORDER, and within thirty (30) days following the end of each calendar quarter while this ORDER is in effect, the Bank shall furnish written progress reports to the Regional Director and to the Commissioner detailing the form and manner of all actions taken to secure compliance with {{9-30-98 p.C-4578}}this ORDER and the results of such actions. 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 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 meeting.
   16. 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.
   Pursuant to delegated authority.
   Dated at Atlanta, Georgia, this 8th day of July, 1998.

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