Federal Deposit
Insurance Corporation

{{3-31-01 p.C-4888}}
   [¶11,695] In the Matter of Home State Bank, Rochester, Texas, Docket No. 99-137b (2-4-00)

   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 has been terminated by order of the FDIC dated 1-16-01; see ¶16,272.)

   [.1] Assets—Tier 1 Capital
   [.2] Dividends—Dividends Restricted
   [.3] Assets—Adversely Classified Assets—Reduction Required
   [.4] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits
   [.5] Loan Loss Reserve—Establishment of or Increase Required
   [.6] Board of Directors—Committee to Review Loan Portfolio
   [.7] Technical Exceptions—Correction of Technical Exceptions Required
   [.8] Management—Comprehensive Review Required
   [.9] Violations of Law—Correction of Violations Required
   [.10] Profit Plan—Preparation of Plan Required
   [.11] Asset/Liability Management—Improve Balance Between Investments and Funding Sources
   [.12] Liquidity—Establish Procedures to Monitor
   [.13] Audit—Required
   [.14] Board of Directors—Committee to Review Compliance with Cease and Desist Order Required
   [.15] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of

HOME STATE BANK
ROCHESTER, TEXAS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-99-137b
   The Home State Bank, Rochester, Texas ("Bank"), through its board of directors, having been advised of its right to the issuance and service of a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC") dated February 4, 2000, whereby, solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and/or regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS ORDERED, that the Bank and institution-affiliated parties of the Bank cease and desist from the following unsafe or unsound banking practices and violations of laws and/or regulations:

(a) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
(b) Operating the Bank without adequate supervision and direction by the board of directors over the management of the Bank;
(c) Operating with an inadequate level of capital protection;
{{4-30-00 p.C-4889}}
(d) Operating the Bank with an excessive level of adversely classified assets;
(e) Engaging in hazardous lending and ineffective and lax collection practices;
(f) Failing to provide an adequate allowance for loan and lease losses;
(g) Operating the Bank in contravention of written loan policies and procedures;
(h) Renewing or extending credit which is inadequately secured;
(i) Renewing or extending credit without adequate and appropriate supporting documentation;
(j) Operating the Bank without adequate liquidity or proper regard for funds management;
(k) Operating the Bank in violation of applicable Federal and State laws and regulations as more fully set forth on pages 25–29 of the Report of Examination of the Bank as of August 30, 1999.

   [.1] 1. (a) By June 30, 2000, the Bank shall achieve and maintain Tier 1 capital equal to or greater than 6.5 percent of its average total assets after establishing an adequate allowance for loan and lease losses as required by paragraph 5. By December 31, 2000, and for so long thereafter as this Order is outstanding, the Bank shall achieve and maintain Tier 1 capital equal to or greater than 7 percent of its average total assets after establishing an adequate allowance for loan and lease losses as required by paragraph 5.
   (b) If such ratio is less than 6.5 percent as determined at an examination by the FDIC or the State banking department ("State"), after June 30, 2000, and prior to December 31, 2000, or less than 7 percent after December 31, 2000, the bank shall, within 30 days after receipt of a written notice of the capital deficiency from the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") or the Banking Commissioner for the State of Texas ("Commissioner"), present to the Regional Director and the Commissioner a plan to increase the Tier 1 leverage capital of the Bank or to take other measures to bring the ratio to the desired percentage. After the Regional Director responds to the plan, the board of directors of the Bank shall adopt the plan, including any modifications or amendments requested by the Regional Director.
   Thereafter, the Bank shall immediately initiate measures detailed in the plan, to the extent such measures have not previously been initiated, to increase its Tier 1 capital by an amount sufficient to bring the ratio to the desired percentage within 90 days after the Regional Director and Commissioner respond to the plan. Such increase in Tier 1 capital and any increase in Tier 1 capital necessary to meet the ratio required by this ORDER may be accomplished by:

   (i) The sale of securities in the form of common stock; or
   (ii) The direct contribution of cash subsequent to August 30, 1999, by the directors and/or shareholders of the Bank; or
   (iii) The direct contribution of cash subsequent to August 30, 1999, by the parent Bank holding company; or
   (iv) Receipt of an income tax refund or the capitalization subsequent to August 30, 1999, of a bona fide tax refund certified as being accurate by a certified public accounting firm; or
   (v) Any other method approved by the Regional Director.

   [.2] 2. While this ORDER is in effect, the Bank shall neither declare nor pay, directly or indirectly, any cash dividend to shareholders without the prior written consent of the Regional Director and the Commissioner.

   [.3] 3. (a) Upon the effective date of this ORDER, the Bank shall, to the extent that it has not previously done so, eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss and one-half of the assets classified Doubtful by the FDIC as a result of its examination of the Bank as of August 30, 1999. Reduction of these assets through proceeds of loans made by the Bank shall not be considered "collection" for the purpose of this paragraph.
   (b) Within 60 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner to reduce the remaining assets classified Doubtful and Substandard as of August 30, 1999. At a minimum, the plan shall include the following:

   (i) A schedule providing quarterly goals to reduce the remaining adversely classified assets as of August 30, 1999, to levels representing not more than a specified percentage of total equity capital and reserves as reported each quarter by the Bank in its Consolidated Reports of Condition and Income and shall include no less than six consecutive quarterly target dates;
   (ii) An explanation showing the complete rationale used by the Bank in constructing the reduction schedule; and,
   (iii) A provision requiring, at a minimum, quarterly reviews by the Bank's board of directors whereby the extent of the Bank's compliance with the plan is expressly addressed, with the results of each review to be recorded in the corporate minutes of the board of directors.

   (i) charge-off;
   (ii) collection;
   (iii) sufficient improvement in the quality of adversely classified assets so as to warrant removing any adverse classification, as determined by the FDIC; or
   (iv) increase of total equity capital and reserves.

   [.4] 4. (a) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has an extension of credit with the Bank that has been classified Loss, either in whole or in part, and is uncollected, or to any borrower who is already obligated in any manner to the Bank on any extension of credit, including any portion thereof, that has been charged off the books of the Bank and remains uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing credit already extended to a borrower after full collection, in cash, of interest due from the borrower.
   (b) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower whose extension of credit is classified Doubtful and/or Substandard, either in whole or in part, and is uncollected, unless the Bank's board of directors has signed a detailed written statement giving reasons why failure to extend such credit would be detrimental to the best interests of the Bank. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.

   [.5] 5. Within 10 days after the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate allowance for loan and lease losses. Such allowance shall be funded by charges to current operating income. Prior to the end of each calendar quarter, the board of directors of the Bank shall review the adequacy of the Bank's allowance for loan and lease losses. Such reviews shall include, at a minimum, the Bank's loan loss experience, an estimate of potential loss exposure in the portfolio, trends of delinquent and non-accrual loans and prevailing and prospective economic conditions. The minutes of the board meetings at which such reviews are undertaken shall include complete details of the reviews and the resulting recommended increases in the allowance for loan and lease losses.

   [.6] 6. (a) Within 90 days after the effective date of this ORDER, the board of directors shall establish a loan review committee to periodically review the Bank's loan portfolio and identify and categorize problem credits. The committee shall file a report with the board of directors. This report shall include the following information:

   (i) The overall quality of the loan portfolio;
   (ii) The identification, by type and amount, of each problem or delinquent loan;
   (iii) The identification of all loans not in conformance with the Bank's lending policy; and
   (iv) The identification of all loans to officers, directors, principal shareholders or their related interests.

   (i) Who shall not be employed by the Bank or its affiliates other than as a director of the Bank or an affiliate;
   (ii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than $175,000.
   (iii) Who shall not be related to any director, principal shareholder of the Bank or to any director or principal shareholder of any affiliate of the Bank; and
   (iv) Who shall be a resident of, or engage in business in, the Bank's trade area.

   [.8]8. (a) Within 90 days after the effective date of this ORDER, the Board shall cause a written review of the performance of bank management and position responsibilities as well as overall staffing requirements, and develop a plan to improve bank management. The review shall be conducted by an independent outside consulting firm. The Board shall then develop a plan to retain adequate management and qualified Bank personnel. The plan may include the addition, dismissal, or reassignment of Bank of- {{4-30-00 p.C-4892}}ficers and staff. The review performed by the independent consulting firm and the final plan developed by the Board shall be submitted to the Regional Director and the Commissioner for review and comment.
   (b) Each member of management shall possess qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications of management personnel shall be evaluated on their ability to:

   (i) comply with the requirements of the ORDER;
   (ii) operate the Bank in a safe and sound manner;
   (iii) comply with applicable laws and regulations, and
   (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, sensitivity to market risk, and liquidity.

   [.9]9. After the effective date of this ORDER, the Bank, consistent with sound banking practices, shall eliminate and/or correct all violations of laws and/or regulations existing in the Bank as of August 30, 1999, as more fully set forth on pages 25 through 29 of the August 30, 1999, Report of Examination. In addition, the Bank shall ensure its future compliance with all applicable laws and regulations.

   [.10]10. Within 90 days of the date of this Order, the Board shall develop a written plan for the Bank to become profitable which includes a projected budget for at least twelve consecutive quarters. The plan shall require that the Board periodically review all general ledger items to determine methods for expense reduction or income enhancement. The Board's consideration of these areas shall be recorded in the official minutes.

   [.11]11. Within 90 days of the date of this Order, the Board shall develop a strategy to improve the bank's liquidity and sensitivity to market risk positions. The strategy and its implementation shall be in a form and manner acceptable to the Regional Director, as determined at subsequent examinations and shall include, at a minimum, the following:
   (a) An asset/liability management strategy to achieve an acceptable rate sensitivity balance between investments and funding sources; and

   [.12](b) Procedures which will enable the board and management to monitor the Bank's liquidity position and maintain liquidity at an adequate level.

   [.13]12. Within 90 days after the effective date of this ORDER, the Board shall implement an effective program for internal audit and controls. The audit program shall provide procedures to test the validity and reliability of operating systems, procedural controls, and resulting records. The Audit Committee shall review the activities of the internal auditor and report quarterly to the Board of Directors.

   [.14]13. Within 60 days after the effective date of this ORDER, the board of directors shall establish a committee of the board of directors charged with the responsibility of ensuring that the Bank complies with the provisions of this ORDER. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.