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   [11,933] In the Matter of McMullen Bank, Tilden, Texas, Docket No. 02-061b (5-17-02).

(This order was terminated by order of the FDIC dated 1-7-04; see ¶16,367.)

   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.

   [.1] Capital—Maintain Tier 1 Capital

   [.2] Dividends—Dividends Restricted

   [.3] Assets—Charge-off or Collection

   [.4] Loan Loss Reserve—Establishment of or Increase Required

   [.5] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits

   [.6] Management—Management Plan Required

   [.7] Loan Policy—Preparation or Revision of Policy Required

   [.8] Loan Review Committee—Establish

   [.9] Violations of Law—Correction of Violations Required

   [.10] Technical Exceptions—Correction of Technical Exceptions Required

   [.11] Budget Plan—Preparation Required

   [.12] Board of Directors—Committee to Review Compliance with Cease and Desist Order Required

   [.13] Interest Rate Risk Policy—Preparation or Revision of Policy Required

   [.14] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of
MCMULLEN BANK
TILDEN, TEXAS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-02-061b

   The McMullen Bank, Tilden, 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 May 9, 2002, 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:

ORDER TO CEASE AND DESIST

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

       (a) Operating the Bank with an inadequate level of capital protection for the kind and quality of assets held by the Bank;

       (b) Operating the Bank with an excessive level of poor quality assets;

       (c) Failing to provide an adequate allowance for loan and lease losses;

       (d) Renewing or extending credit which is inadequately secured;

       (e) Refinancing credits to borrowers in weak financial positions without improving collateral margins or establishing structured repayment programs;

       (f) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;

       (g) Operating the Bank without adequate supervision and direction by the Bank's board of directors over the management of the Bank;

       (h) Engaging in hazardous lending and/or lax collection practices;

       (i) Operating the Bank in contravention of written loan policies and procedures;

       (j) Operating the Bank in violation of applicable Federal and State laws and regulations as more fully set forth on page 25 of the Report of Examination of the Bank as of December 31, 2001;

       (k) Renewing or extending credit without adequate and appropriate supporting documentation;

       (l) Operating the Bank with inadequate earnings to fund growth, support dividend payments and augment capital.

   IT IS FURTHER ORDERED,, that the Bank shall take affirmative action as follows:

   [.1]1. (a) Within 60 days after the effective date of this ORDER, and for so long thereafter as this ORDER is outstanding, the Bank shall maintain Tier 1 capital equal to or greater than 8 percent of its adjusted average total assets after establishing an adequate allowance for loan and lease losses as required herein.

   (b) If such ratio is less than 8 percent as determined at an examination by the FDIC or the Texas State banking department ("State"), 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 Bank Commissioner for the State of Texas ("Commissioner"), present to the Regional Director and the Commissioner a plan to increase the Tier 1 capital of the Bank or to take other measures to bring the ratio to 8 percent. After the Regional Director and Commissioner respond to the plan, the board of directors of the Bank shall adopt the plan, including any modifications or amendments requested by the Regional Director and Commissioner.

   Thereafter, to the extent such measures have not previously been initiated, the Bank shall immediately initiate measures detailed in the plan, to increase its Tier 1 capital by an amount sufficient to bring the ratio to 8 percent within 60 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 December 31, 2001 by the director and/or shareholders of the Bank or by the Bank's holding company; or

       (iii) Receipt of an income tax refund or the capitalization subsequent to December 31, 2001 of a bona fide tax refund certified as being accurate by a certified public accounting firm; or

       (iv) Any other method approved by the Regional Director and the Commissioner.

   (c) If all or part of the increase in Tier 1 capital required by this ORDER is to be accomplished by the sale of new securities, the Bank's board of directors shall adopt and implement a plan for the sale of such additional securities. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare 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 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 plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration, Disclosure and Securities
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   Operation Unit, Washington, D.C. 20429, for review. Any changes requested to be made in the plan or the materials by the FDIC shall be made prior to their dissemination. If the increase in Tier 1 capital is to be provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue shall be presented to the Regional Director for prior approval.

   (d) In complying with the provisions of this ORDER and until such time as any such public offering is terminated, the Bank shall provide to any subscriber and/or 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 shall be furnished within 10 days after the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber who received or was tendered the information contained in the Bank's original offering materials.

   (e) In addition to the requirements of subparagraphs 1(a) and (b), the Bank shall comply with the FDIC's Statement of Policy on Risk-Based Capital found in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, App. A.

   (f) For the purposes of this ORDER, all terms relating to Tier 1 capital shall be calculated according to the methodology set forth in the report of examination.

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

   [.3]3. (a) Within 30 days after 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 December 31, 2001. 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 December 31, 2001. At a minimum, the plan shall include the following:

       (i) A schedule providing quarterly goals to reduce the remaining adversely classified assets as of December 31, 2001 to levels representing not more than a specified percentage of Tier 1 capital plus the allowance for loan and lease losses 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 Bank's board of directors.

   (c) Upon written notice from the Regional Director or the Commissioner that the submitted plan is not acceptable, the Bank shall, within 30 days after receipt of such notice, submit amendments to the plan to the Regional Director and the Commissioner, including any modifications or amendments requested by the Regional Director or Commissioner. Upon written notice that the plan is accepted, it shall be adopted by the Bank's board of directors. The Bank shall then immediately initiate measures detailed in the plan to the extent such measures have not been initiated.

   (d) For purposes of the plan, the reduction of the level of adversely classified assets as of December 31, 2001, to a specified percentage of Tier 1 capital plus the allowance for loan and lease losses may be accomplished by:

       (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 Tier 1 capital.

   (e) While this ORDER is in effect, the
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   Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as determined at any future examination conducted by the FDIC or the State.

   [.4]4. (a) Within 30 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 Bank's board of directors 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 Bank's board of directors' 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.

   (b) Within 30 days after the effective date of this ORDER, the Bank shall review Consolidated Reports of Condition and Income filed with the FDIC on or after December 31, 2001, and amend said reports if necessary to properly reflect the financial condition of the Bank as of the date of each such report. In particular, such reports shall contain an adequate allowance for loan and lease losses. Reports filed after the effective date of this ORDER shall also accurately reflect the financial condition of the Bank as of the reporting date.

   [.5]5. (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 Bank's board of directors' meeting.

   [.6]6. (a) Within 90 days after the effective date of this ORDER, the Bank shall develop a plan to improve Bank management. The plan may be developed by an independent committee of the Bank's board of directors or an outside consultant reporting to the Bank's board of directors. If the committee is composed of members of the Bank's board of directors, a majority of the committee shall consist of directors that are not officers at the Bank or family members of Bank officers. At a minimum, the plan shall include the following:

       (i) A review of the current and past performance of Bank management and senior lending officials;

       (ii) An analysis of current key position descriptions at the Bank; and

       (iii) An analysis of the overall staffing requirements of the Bank.

   The plan may include the addition, dismissal, or reassignment of Bank officers and staff. If appropriate, the plan shall provide for management succession, thus ensuring the continuity of a satisfactory management team at the Bank.

   (b) Each Bank officer shall possess qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications of the Bank loan officers shall further include an appropriate level of lending, collections, and loan supervision experience for the type and quality of the Bank's loan portfolio. The qualifications of Bank management personnel shall be evaluated on their ability to:

       (i) Comply with the requirements of this ORDER;

       (ii) Operate the Bank in a safe and sound manner;

       (iii) Comply with all applicable laws and regulations; and

       (iv) Restore all aspects of the Bank to a safe and sound condition, including as appropriate, asset quality, capital adequacy,
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       earnings, management effectiveness, and liquidity.

   (c) A copy of the plan shall be submitted to the Regional Director and the Commissioner for review and comment. Once comments have been received from the Regional Director and the Commissioner, the Bank shall immediately initiate actions to implement the plan as amended or modified by the Regional Director and the Commissioner.

   (d) While this ORDER is in effect, the Bank shall notify the Regional Director and the Commissioner in writing of any changes in Bank management. The notification must include the name(s) and background(s) of any replacement personnel and must be provided to the Regional Director and the Commissioner prior to the individual(s) assuming the position(s) with the Bank.

   [.7]7. Within 60 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies and procedures to provide effective guidance and control over the Bank's lending function. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner, as determined at subsequent examinations, and shall include, at a minimum, the following:

       (a) A provision that deviations from the written lending policies and procedures require prior approval of the Bank's board of directors;

       (b) A requirement that all loans in excess of $150,000 shall be reviewed and receive the prior approval of the Bank's board of directors;

       (c) A requirement that all loans shall have written repayment understandings;

       (d) Guidelines under which loans are renewed or have their due dates extended.

   [.8]8. (a) Within 60 days after the effective date of this ORDER, the Bank's 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 Bank's board of directors at each board meeting. 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.

   (b) At least 50 percent of the members of the loan review committee shall be directors not employed in any capacity by the Bank other than as a director.

   [.9]9. Within 60 days 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 December 31, 2001, as more fully set forth on page 25 of the December 31, 2001 Report of Examination. In addition, the Bank shall ensure its future compliance with all applicable laws and regulations.

   [.10]10. Within 60 days after the effective date of this ORDER, the Bank shall endeavor to eliminate and/or correct all technical exceptions with regard to loan documentation existing in the Bank as of December 31, 2001, as more fully set out on pages 52 through 56 of the December 31, 2001 Report of Examination.

   [.11]11. Within 90 days after the effective date of this ORDER, the Bank's board of directors shall develop a projected budget for the Bank encompassing at least twelve consecutive quarters. The Bank's board of directors shall periodically review all general ledger items to determine methods for expense reduction and/or income enhancement. The Bank's board of directors' consideration of these areas shall be recorded in the official minutes of the Bank's board of directors meetings.

   [.12]12. Within 60 days after the effective date of this ORDER, the Bank's board of directors shall establish a subcommittee of the board of directors of the Bank charged with the responsibility of ensuring that the Bank complies with the provisions of this ORDER. At least 50 percent of the members of such subcommittee shall be directors not employed in any capacity by the Bank other than as a director. The committee shall report monthly to the full board of directors of the Bank and a copy of the report and any discussion relating to the report or the ORDER
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   shall be noted in the minutes of the Bank's board of directors' meetings. The establishment of this subcommittee shall not diminish the responsibility or liability of the entire board of directors of the Bank to ensure compliance with the provisions of this ORDER.

   [.13]13. Within 60 days after the effective date of the ORDER, the Bank shall develop, adopt, and implement an interest rate risk policy and procedures that shall include, at a minimum:

       (a) Measures designed to control the nature and amount of interest rate risk the Bank takes including those that specify risk limits and define lines of responsibilities and authority for managing risk;

       (b) A system for identifying and measuring interest rate risk;

       (c) A system for monitoring and reporting risk exposures; and

       (d) A system of internal controls, review, and audit to ensure the integrity of the overall risk management process.

   [.14]14. After 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 also (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, statement, or notice shall be sent to the FDIC, Registration, Disclosure and Securities Operations Unit, Washington, D.C. 20429, for review at least 20 days prior to dissemination to shareholders. Any changes requested by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.

   15. Within 30 days after the end of the first calendar quarter following the effective date of this ORDER, and within 30 days after the end of each successive calendar quarter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this 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 Commissioner have released the Bank in writing from making additional reports.

   16. The effective date of this ORDER shall be 10 days after the date of its issuance. This ORDER shall be binding upon the Bank and all institution-affiliated parties of the Bank. The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC. Pursuant to delegated authority.

   Dated at Dallas, Texas, this 17th day of May, 2002.

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