(This order was terminated and modified by orders of the FDIC dated 6-13-03, 3-29-04; see ¶¶16,338,
16,376.)
[.1] ManagementQualifications Specified
[.2] ManagementManagement Plan Required
[.3] CapitalIncrease Required
[.4] DividendsDividends Restricted
[.5] AssetsCharge-off or Collection
[.6] LoansRisk PositionWritten Plan Required
[.7] LoansSpecial Mention
[.8] LoansExtensions of CreditTo Borrowers with Existing Adversely
Classified Credits
[.9] Loan Loss ReserveEstablishment of or Increase Required
[.10] LoansConcentration of CreditReduction Required
[.11] Loan PolicyPreparation or Revision of Policy Required
[.12] Growth PlanMinimum Requirements
[.13] Violations of LawCorrection of Violations Required
[.14] Profit PlanPreparation of Plan Required
[.15] ShareholdersDisclosure of Cease and Desist Order Required
[.16] Board of DirectorsProgram to Review Compliance with Cease and Desist
Order Required
{{7-31-02 p.C-5423}}
In the Matter of
HEARTLAND COMMUNITY BANK
FRANKLIN, INDIANA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-02-026b
Heartland Community Bank, Franklin, Indiana ("Bank"), having
been advised of its right to a NOTICE OF CHARGES AND OF HEARING
detailing the unsafe or unsound banking practices and violations of law
and 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 under
Indiana Code Section 28-11-4, and having waived those rights, entered
into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE
AND DESIST ("CONSENT AGREEMENT") with representatives of the
Federal Deposit Insurance Corporation ("FDIC"), and the
Department of Financial Institutions for the State of Indiana
("DFI") dated April 15, 2002, whereby, solely for the purpose of
this proceeding and without admitting or denying the charges of unsafe
or unsound banking practices and violation or regulation, the Bank
consented to the issuance of an ORDER TO CEASE AND DESIST
("ORDER") by the FDIC and DFI.
The FDIC and DFI considered the matter and determined that they had
reason to believe that the Bank had engaged in unsafe or unsound
banking practices and violations of laws and regulation. The FDIC and
DFI, 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 or unsound banking practices and violations of law and
regulation:
A. Engaging in hazardous lending and lax collection practices,
including, but not limited to, the failure to obtain proper loan
documentation, the failure to establish and monitor collateral margins
of secured borrowers, and other poor credit administration practices.
B. Operating with an excessive level of adversely classified loans and
assets listed for "Special Mention".
C. Operating with an inadequate level of capital protection for the
kind and quality of assets held.
D. Operating with an inadequate allowance for loan and lease losses
("ALLL") for the volume, kind, and quality of loans and leases
held.
E. Operating with inadequate earnings to maintain acceptable levels of
capital.
F. Violating laws and regulations.
G. Operating with excessive concentrations of credit.
H. Failing to follow the Bank's loan policy.
I. Operating with inadequate policies to monitor and control asset
growth.
J. Operating with management whose policies and practices are
detrimental to the Bank and jeopardize the safety of its deposits.
K. Operating with a board of directors which has failed to provide
adequate supervision over and direction to the management of the Bank.
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 60 days from the effective date of this ORDER, the Bank
shall have and retain qualified management. At a minimum, such
management shall include a new 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
person shall be provided the necessary written authority to implement
the relevant 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
{{7-31-02 p.C-5424}}
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") and the Director of DFI ("Director")
in writing of any changes in any of the Bank's directors or senior
executive officers. For purposes of this ORDER, "senior executive
officer" is defined as in section 32 of the Act ("section
32"), 12 U.S.C. §1831(i), and section 303.101(b) of the FDIC
Rules and Regulations, 12 C.F.R. §303.101(b).
(c) 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 Subpart F of
Part 303 of the FDIC Rules and Regulations, 12 C.F.R.
§§ 303.100303.104. In addition, prior to the addition of any
director or the employment of any senior executive officer, the Bank
shall request and obtain the written approval of the Regional Director
and the Director.
[.2]2. (a) Within 60 days from the effective date of this ORDER, the Bank
shall retain a bank consultant acceptable to the Regional Director and
the Director. The consultant shall develop a written analysis and
assessment of the Bank's management and staff needs ("Management
Plan") for the purpose of providing qualified management for the
Bank.
(b) The Bank shall provide the Regional Director and the Director with
a copy of the proposed engagement letter or contract with the
consultant for review before it is executed. The contract or engagement
letter, at a minimum, should include:
(i) A description of the work to be performed under the contract
or engagement letter;
(ii) The responsibilities of the consultant;
(iii) An identification of the professional standards covering the work
to be performed;
(iv) An identification of the specific procedures to be used when
carrying out the work to be performed;
(v) The qualifications of the employee(s) who are to perform the work;
(vi) The time frame for completion of the work;
(vii) Any restrictions on the use of the reported findings; and
(viii) A provision for unrestricted examiner access to workpapers.
(c) The Management Plan shall be developed within 120 days from
the effective date of this ORDER. The Management Plan shall include, at
a minimum:
(i) Identification of both the type and number of officer
positions needed to properly manage and supervise 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 all Bank officers and lending staff members 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 restoration and maintenance of the Bank in a safe and
sound condition; and
(iv) A plan to recruit and hire any additional or replacement personnel
with the requisite ability, experience, and other qualifications to
fill those officer or staff member positions identified by this
paragraph of this ORDER.
(d) The Management Plan and any subsequent modifications thereto
shall be submitted to the Regional Director and the Director for review
and comment upon its completion. Within 30 days from the receipt of any
comments from the Regional Director and the Director and after the
adoption of any recommended changes, the Bank shall approve the
Management Plan, and record its approval in the minutes of the board of
directors' meeting. Thereafter, the Bank, its directors, officers, and
employees shall implement and follow the Management Plan and any
subsequent modification.
[.3]3. (a) Within 60 days from the effective date of this ORDER, the Bank
shall increase its level of Tier 1 capital as a percentage of its total
assets ("capital ratio") to not less than 8.0 percent.
(b) 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 capital ratio for that calendar
quarter. If the capital ratio is less than 8.0 percent,
{{7-31-02 p.C-5425}}
the Bank shall,
within 60 days of the date of the required determination, increase its
capital ratio to not less than 8.0 percent calculated as of the end of
that preceding quarterly period. For purpose of this ORDER, Tier 1
capital and total assets shall be calculated in accordance with Part
325 of the FDIC Rules and Regulations ("Part 325"), 12 C.F.R.
Part 325.
(c) 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;
(ii) The elimination of all or part of the assets classified
"Loss" as of December 3, 2001, 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;
(iii) The collection in cash of assets previously charged off;
(iv) The direct contribution of cash by the directors and/or the
shareholders of the Bank;
(v) Any other means acceptable to the Regional Director and the
Director; or
(vi) Any combination of the above means.
(d) 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
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 other material
disclosures necessary to comply with 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 Registration and
Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429, and
to the Department of Financial Institutions, State of Indiana, Indiana
Government Center South, 402 West Washington Street, Room W066,
Indianapolis, Indiana 46204, for their review. Any changes requested to
be made in the materials by the FDIC or DFI shall be made prior to
their dissemination.
(e) In complying with the provisions of this paragraph, 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.
(f) 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.
[.4]4. 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 8.0
percent, without the prior written consent of the Regional Director and
the Director.
[.5]5. 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 December 3, 2001, 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 and the 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.
[.6]6. (a) Within 45 days from the effective date of this ORDER, the Bank
shall formulate and submit to the Regional Director and the 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 Report.
{{7-31-02 p.C-5426}}
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 the 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 and
DFI.
(d) Within 30 days from the receipt of any comment from the Regional
Director and the Director, and after the 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.
[.7]7. (a) Within 90 days from the effective date of this ORDER, the Bank
shall correct all documentation deficiencies in loans classified
"Substandard" and loans listed for "Special Mention" in the
Joint FDIC/DFI Report of Examination of the Bank as of December 3, 2001
("Report").
(b) Following the effective date of this ORDER, the Bank's
management shall submit a written progress report on correcting
documentation deficiencies relating to loans classified
"Substandard" and loans listed for "Special Mention" to the
Bank's board of directors for review and notation in the minutes of
the meetings of the board of directors.
[.8]8. (a) 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 who is already obligated in any manner to the
Bank on any extensions of credit (including any portion thereof) that
has been charged off the books of the Bank or classified "Loss"
so long as such credit remains uncollected.
(b) 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 other credit has been classified
"Substandard" or is listed for Special Mention 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 the applicable board of
directors' meeting.
[.9]9. (a) Within 30 days from the effective date of this ORDER, the Bank
shall replenish its allowance for loan and lease losses ("ALLL")
in the amount of at least $750,000.
(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 the Federal Financial Institutions Examination Council
("FFIEC") Instructions for the Reports of Condition and Income
and any analysis of the Bank's ALLL provided by the FDIC.
(c) Within 30 days from the effective date of this ORDER, Reports
of Condition and Income required by the FDIC and filed by the Bank
subsequent to December 3, 2001, but prior to the effective date of this
ORDER, 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 this paragraph.
(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, provide for an adequate ALLL, and accurately report the same. The
minutes of the board meeting at which such review is undertaken shall
indicate the findings of the review, the amount of increase in the
reserve recommended, if any, and the basis for determination
{{7-31-02 p.C-5427}}
of the amount of ALLL provided. In making these determinations, the board of
directors shall consider the FFIEC Instructions for the Reports of
Condition and Income and any analysis of the Bank's ALLL provided by
the FDIC.
(e) ALLL entries required by this paragraph shall be made prior to any
Tier 1 capital determinations required by this ORDER.
(f) While this ORDER is in effect, the Bank shall submit to the
Regional Director and the Director the analysis supporting the
determination of the adequacy of its ALLL. These submissions shall be
made at such times as the Bank files the progress reports otherwise
required by the ORDER.
[.10]10. Within 90 days from the effective date of this ORDER, the Bank
shall adopt and implement a written plan to reduce the concentrations
in acquisition, development, and construction loans, in commercial real
estate loans, and in high loan-to-value loans, as described in the
Report. 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) Within 270 days of the effective date of this ORDER,
concentrations as a percentage of the Bank's Tier 1 capital shall be
reduced to no more than the following:
Acquisition, Development and Construction:
Residential Construction Spec |
10 Percent |
Residential Construction Presold |
35 Percent |
Commercial Construction |
50 Percent |
Residential Lot Loans |
5 Percent |
Subdivisions |
25 Percent |
Commercial Real Estate:
Office Building |
35 Percent |
Strip Center |
5 Percent |
Manufacturing |
5 Percent |
Wholesale |
5 Percent |
Retail |
30 Percent |
Churches |
5 Percent |
Warehouses |
10 Percent |
Other Commercial Real Estate |
75 Percent |
Loans Secured by Multiple Collateral |
30 Percent |
High Loan-To-Value LoansAll Types |
100 Percent |
(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 board of directors meetings.
(c) Establishment of procedures to ensure the accurate reporting of all
concentrations to the Bank's board of directors. Reports detailing
commercial real estate concentrations shall contain information
regarding the specific types of credits within this concentration.
[.11]11. (a) Within 90 days from the effective date of this ORDER, and
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 thereto shall be submitted to the Regional Director and
the 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:
(i) All recommendations detailed in the Report;
(ii) A demand deposit overdraft policy; and
(iii) Review and monitoring procedures to ensure that all lending
personnel are adhering to established lending procedures and that the
Bank's board of directors is receiving timely and fully documented
reports on loan activity, including any deviations from established
policy.
(c) Within 30 days from the receipt of any comments from the
Regional Director and the 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 approval
shall be recorded in the minutes of a board of directors' meeting.
Thereafter, the Bank shall implement and follow the amended written
loan policy.
[.12]12. During the life of this ORDER, the Bank shall not increase its
total assets by more than 3.0 percent during any consecutive
three-month period without providing, at least 30 days prior to its
implementation, a growth plan to the Regional Director and the
Director. Such growth plan, at a minimum, shall include the funding
source to support the projected growth, as well as the
{{7-31-02 p.C-5428}}
anticipated use of funds. This growth plan shall not be implemented without the prior
written consent of the Regional Director and the Director. In no event
shall the Bank increase its total assets by more than 12 percent
annually. For the purpose of this paragraph, "total assets" shall
be defined as in the FFIEC's Instructions for the Consolidated Reports
of Condition and Income.
[.13]13. Within 60 days from the effective date of this ORDER, the Bank
shall correct the violation of section 323.5(b)(1) of the FDIC Rules
and Regulations, 12 C.F.R. §323.5(b)(1) cited in the Report. Within
one year from the effective date of this ORDER, the Bank shall correct
the concentrations of credit leading to the violation of Part 365 of
the FDIC Rules and Regulations, 12 C.F.R. Part 365, in accordance with
Paragraph 10 of this ORDER.
[.14]14. (a) Within 90 days from the effective date of this ORDER, the Bank
shall adopt and implement a written profit plan and a realistic,
comprehensive budget for all categories of income and expense for the
remainder of calendar year 2002. Within 180 days from the effective
date of this ORDER, the Bank shall adopt and implement a written profit
plan and a realistic, comprehensive budget for all categories of income
and expense for calendar year 2003. The plans 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. A copy of the plan shall be submitted to
the Regional Director and the Director upon its completion.
(b) Within 30 days from the end of each calendar quarter following
completion of the profit plan and budget required by this paragraph,
the Bank's board of directors shall evaluate the Bank's actual
performance in relation to the plan and budget, record the results of
the evaluation, and note any actions taken by the Bank in the minutes
of the board of directors' meeting at which such evaluation is
undertaken.
[.15]15. 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 next shareholder communication by
Heartland Bancshares, Inc.; and (2) in conjunction with its notice or
proxy statement preceding the next shareholder meeting of Heartland
Bancshares, Inc. 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 Registration and
Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429 and
to the Department of Financial Institutions, State of Indiana, Indiana
Government Center South, 402 West Washington Street, Room W066,
Indianapolis, Indiana 46204, for review at least 20 days prior to
dissemination to shareholders. Any changes requested to be made by the
FDIC or DFI shall be made prior to dissemination of the description,
communication, notice or statement. Disclosure by Heartland Bancshares
Inc. through Form 10-K and Form 10-QSB filings with the Securities
Exchange Commission ("SEC") describing this ORDER shall
constitute compliance with the provisions of this paragraph, provided
that the Bank notifies the Regional Director and Director in writing of
its intention to comply with this provision through SEC filings.
[.16]16. (a) Within 30 days from the effective date of this ORDER, the
Bank's board of directors shall have in place a program that will
provide for monitoring of the Bank's compliance with this ORDER.
(b) Following the required date of compliance with subparagraph (a) of
this paragraph, the Bank's board of directors shall review the Bank's
compliance with this ORDER and record its review in the minutes of each
regularly scheduled board of directors' meeting.
(c) Within 10 days after each board meeting following the effective
date of the ORDER, the Bank shall submit to the Regional Director and
Director the board packet from the board meeting.
17. Within 30 days from the end of each calendar quarter following
the effective date of this ORDER, the Bank shall furnish to the
Regional Director and the Director written progress reports which have
been formally adopted by the Bank's board of directors, detailing the
actions taken to secure compliance with the ORDER and the results
thereof. Such reports may be discontinued when the corrections required
by this ORDER have been accomplished and the Regional Director and the
Director have, in writing, released the Bank from making further
reports.
{{11-30-03 p.C-5429}}
The effective date of this ORDER shall be 10 calendar days after its
issuance by the FDIC and DFI.
The provisions of this ORDER shall be binding upon the Bank, its
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 provision has
been modified, terminated, suspended, or set aside by the FDIC and DFI.
Pursuant to delegated authority.
Dated: May 1st, 2002.