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FDIC Enforcement Decisions and Orders

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   [11,956] In the Matter of The Peoples State Bank, Hodgenville, Kentucky, Docket No. 02-077b (8-5-02).

(This order was terminated by order of the FDIC dated 8-14-03; see ¶16,349.)

   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] Management—Qualifications Specified

   [.2] Management—Management Report Required

   [.3] Capital—Maintain Tier 1 Capital

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

   [.5] Profit Plan—Preparation of Plan Required

   [.6] Assets—Charge-off or Collection

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

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

   [.9] Loan Review and Grading System—Establishment of Required
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   [.10] Violations of Law—Correction of Violations Required

   [.11] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required

   [.12] Asset/Liability Management—Preparation or Revision of Asset/Liability Management Policy Required

   [.13] Investments and Investment Policy—Investment Policy, Preparation or Revision Required

   [.14] Reports of Condition and Income—Amendment Required

   [.15] Dividends—Dividends Restricted

   [.16] Audit—Internal Audit—Minimum Procedures Specified

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

In the Matter of
THE PEOPLES STATE BANK
HODGENVILLE, KENTUCKY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-02-077b

   The Peoples State Bank, Hodgenville, Kentucky ("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/or regulations and contraventions of policy alleged to have been committed by the Bank and of its right to a hearing on the 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 counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated July 17, 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, and contraventions of policy, 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 law and/or 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 directors, officers, employees, agents, and other 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:

       (a) engaging in hazardous lending and lax collection practices;

       (b) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;

       (c) operating with a large volume of poor quality loans;

       (d) operating with an inadequate loan valuation reserve;

       (e) operating with inadequate provisions for liquidity in light of the Bank's asset and liability mix;

       (f) operating with inadequate provisions for interest rate risk measurement and monitoring;

       (g) operating in such a manner as to produce low earnings;

       (h) operating in violation of Part 323 of the FDIC Rules and Regulations, 12 C.F.R. §323.3; of Part 326 of the FDIC Rules and Regulations, 12 C.F.R. §326.8; of Part 337 of the FDIC Rules and Regulations, 12 C.F.R. §337.3(c); of Section 39 of the Act, 12 U.S.C. §1831p-1, and in contravention of Appendix A to Part 364 of the FDIC Rules and Regulations, 12 C.F.R. §364; in violation of Sections 287.280 and 287.065 of the Kentucky Revised Statutes; in contravention of the Interagency Policy Statement on the Allowance for Loan and Lease Losses, FDIC Financial Institutions Letter 89-93 (12/21/1993); the Joint Agency Policy Statement on Interest Rate Risk, 61 Fed. Reg. 33169 (6/26/1996); and the Interagency Policy Statement
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       on the Internal Audit Function and its Outsourcing, FDIC Financial Institutions Letter 133-97 (12/22/1997).

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

       (j) operating with a board of directors which has failed to provide adequate supervision over and direction to the active 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) During the life of this ORDER, the Bank shall have management qualified to restore the Bank to a sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible for supervising the Bank's overall lending function.

   (b) Management shall be assessed on its ability to:

       (i) Comply in all material respects with the requirements of this ORDER;

       (ii) Improve and thereafter maintain the Bank in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, earnings adequacy, and sensitivity to market risk; and

       (iii) Comply in all material respects with all applicable State and Federal laws and regulations, and all FDIC and Federal Financial Institutions Examination Council ("FFIEC") policy statements;

   (c) (i) During the life of this ORDER, the Bank shall notify the Regional Director of the Chicago Regional Office ("Regional Director") and the Commissioner of the Kentucky Department of Financial Institutions ("Commissioner"), in writing, of any resignations and/or terminations of any members of its board of directors and/or any of its senior executive officer(s) within 15 days of the event; and

       (ii) The Bank shall comply with Section 32 of the Act, 12 U.S.C. §1831i, and shall notify the Regional Director and the Commissioner, in writing, at least 30 days prior to an individual assuming a new position, or of any additions to its board of directors and senior executive officers.

   (d) Within 30 days from the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure that the Bank complies with the provisions of this ORDER. At least one half of the members of such committee shall be independent, outside directors as defined herein. 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.

   (e) For the purposes of this ORDER, an "outside director" shall be an individual:

       (i) Who shall not be employed, in any capacity, by the Bank or its affiliates other than as a director of the Bank or an affiliate;

       (ii) Who shall not own or control more than 5 percent of the voting stock of the Bank or its holding company;

       (iii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than 5 percent of the Bank's equity capital and reserves;

       (iv) Who shall not be related to any directors, principal shareholders of the Bank or affiliates of the Bank; and

       (v) Who shall be a resident of, or engage in business in, the Bank's trade area.

   (f) Within twelve months of the effective date of this ORDER, each member of the board of directors shall attend at least eight hours of training related to the duties and responsibilities of bank directors. This training shall be conducted by a recognized organization of bankers or be sponsored and approved by such an organization.

   [.2]2. (a) Within 90 days from the date of this ORDER, the board of directors shall review and make a written report ("Management Report") on the Bank's management needs in the lending area. The Management Report shall incorporate an analysis of the Bank's management and staffing requirements and shall, at a minimum:

       (i) Identify both the number and type of positions needed to properly supervise the Bank's lending functions, giving appropriate consideration to the Bank's loan volume, customer base, and the number of problem credits;
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       (ii) Provide a clear and concise description of the general duties and responsibilities for lending officers and their support staff;

       (iii) Identify the skills, experience, and pay required for each position;

       (iv) Provide an evaluation of the Bank's senior management and lending officials, indicating whether Bank officials possess the necessary lending and collection experience and qualifications required to perform present and anticipated duties adequately;

       (v) Establish a plan to recruit, hire, and/or replace personnel based on ability and experience;

       (vi) Establish a plan providing for periodic evaluation of each individual's job performance; and

       (vii) Provide for periodic review of Bank's management and updating of lending policies and procedures.

   (b) The board of directors shall obtain the services of an outside consultant(s), acceptable to the Regional Director and the Commissioner, who is knowledgeable in the area of lending, collections, and personnel evaluation to assist the board of directors in reviewing the Bank's management needs and preparing the Management Report. The acceptability of the consultant(s) shall be based on the consultant's ability to advise the Bank in each of the areas identified in Paragraph 2(a).

   (c) Within 120 days of the effective date of this ORDER, the board of directors, with the assistance of the outside consultant(s), shall prepare a written plan of implementation ("Plan") addressing the findings of the Management Report. The Plan shall specify the actions to be taken by the board of directors and the time frames for each action.

   (d) Within 120 days of the effective date of this ORDER, the board of directors shall prepare a written report ("Written Report") which shall (1) contain a recitation identifying the recommendations made by the outside consultant(s), which have been incorporated in the Management Report and Plan, (2) a recitation identifying the recommendations made by the outside consultant(s), which were not incorporated in the Management Report and Plan and the reasons for not including such recommendations, and (3) a copy of any report(s) prepared by the outside consultant(s).

   (e) A copy of the Management Report, Plan, and Written Report shall be submitted to the Regional Director and the Commissioner for review and comment. Within 30 days from receipt of any comment, and after consideration of such comment, the board of directors shall approve the Management Report and Plan of implementation which approval shall be recorded in the minutes of the meeting of the board of directors. It shall remain the responsibility of the board to fully implement the plan within the specified time frames. In the event the Plan, or any portion thereof, is not implemented, the board shall immediately advise the Regional Director and the Commissioner, in writing, of specific reasons for deviating from the Plan.

   [.3]3. (a) Within 90 days from the effective date of this ORDER, the Bank shall increase its Tier I capital equal to or greater than eight percent (8%) of its adjusted total assets as defined by Part 325 of the FDIC Rules and Regulations ("Part 325"). Thereafter, during the life of this ORDER, the Bank shall maintain Tier I capital equal to or greater than eight percent (8%) of the Bank's adjusted Part 325 total assets.

   (b) Any increase in Tier I capital necessary to meet the requirements of Paragraph 3(a) of this ORDER may be accomplished by the following:

       (i) The sale of new securities in the form of common stock; or

       (ii) The direct contribution of cash by the directors, shareholders, or parent Bank holding company of the Bank; or

       (iii) Any other method acceptable to the FDIC.

   (c) If all or part of the increase in Tier I capital required by Paragraph 3(a) of this ORDER is 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 or controlled by them in favor of the plan. 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 the Federal securities laws. Prior to the implementation
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   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, Accounting & Securities Unit, 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429, for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination. If the Regional Director allows any part of the increase in Tier I capital to be provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue, including but not limited to, those terms and conditions relative to the interest rate and any convertability factor, shall be presented to the Regional Director for prior approval.

   (d) In complying with the provisions of Paragraph 3 of this ORDER, 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 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 days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.

   (e) For purposes of this ORDER, the terms "Tier I capital", and "Part 325 total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively subsections 325.2(t), and 325.2(v), 12 C.F.R. §§ 325.2(t) and (v). The "Capital Calculations" schedule on page 61 of the Report of Examination provides the method for determining the ratio of Tier I capital to adjusted Part 325 total assets as required by this ORDER.

   (f) The Bank shall not lend funds directly or indirectly, whether secured or unsecured, to any purchaser of Bank stock or to any investor by any other means for any portion of any increase in Tier I capital required herein.

   [.4]4. (a) Within 30 days from the effective date of this Order, the Bank shall establish and shall thereafter maintain, through charges to current operating income, an adequate valuation reserve for loan and lease losses. In determining the adequacy of the valuation reserve for loan and lease losses, the board of directors of the Bank shall at a minimum consider the following:

       (i) The prevailing instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions-Consolidated Reports of Conditions and Income";

       (ii) The volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as an analysis of net charge-offs experienced on previously adversely classified loans;

       (iii) The extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of risk associated with such loans;

       (iv) The trend in loan growth, including any rapid increase in loan volume within a relatively short time period;

       (v) The general and local economic conditions affecting the collectibility of the Bank's loans;

       (vi) The Bank's previous loan loss experience by loan type, including the trend of net charge-offs as a percent of average loans over the past several years;

       (vii) The off balance sheet credit risks; and

       (viii) The other factors appropriate in determining future valuation reserves.

   (b) Prior to the submission of any Report of Condition or Report of Income, the board of directors of the Bank shall review the adequacy of the Bank's valuation reserve for loan and lease losses. The minutes of the board meetings at which each review is undertaken shall indicate the results of the review, the amount of any increase to the reserve, and the basis for the amount of the valuation reserve. The criteria for the review shall be as set forth in Paragraph 4(a).

   (c) Notwithstanding the provisions of Paragraph 4(a) and 4(b) above, the Bank shall achieve, within 30 days of the effective date of this ORDER, a valuation reserve for loan and lease losses, after charge-off of loans classified "Loss" as required in Paragraph 6(a) below, of not less than $1,820,000, and shall thereafter maintain, through charges to
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   current operating income, an adequate valuation reserve for loan and lease losses.

   (d) In the event that the Regional Director and/or the Commissioner determine, at subsequent examinations and/or visitations, that the Bank's valuation reserve for loan and lease losses is inadequate, the Bank shall amend its Consolidated Reports of Condition and Income in accordance with Paragraph 14 of this ORDER.

   (e) The requirements of Paragraph 4(c) above are not to be construed as a standard for future operations.

   [.5]5. (a) Within 60 days from the effective date of this ORDER, and within the first 30 days of each calendar year thereafter, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank for each calendar year. The 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 on not less than a quarterly basis; and

       (iv) A description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   (b) Such written profit 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 after the receipt of any comment from the Regional Director and/or the Commissioner, the board of directors shall approve the written profit plan which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification.

   [.6]6. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of February 19, 2002, that have not been previously collected or charged-off. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.

   (b) Within 10 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for contingent liabilities and charge to the reserve all contingent liabilities classified "Loss" of not less than $47,279.00 as of February 19, 2002.

   (c) Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director and the Commissioner for review and approval a written plan of action directed at lessening the Bank's risk position in each line of credit or other asset which was classified "Substandard" or "Doubtful" as of February 19, 2002, and which aggregated $100,000 or more. Such plan shall include, but not be limited to, the following:

       (i) Target dollar levels to which the Bank will reduce each line of credit or other asset within three months, six months, and twelve months from the effective date of this ORDER; and

       (ii) Provisions for the submission of monthly written progress reports under this Paragraph 6 to the Bank's board of directors for review and recordation in the board minutes.

   (d) Within 90 days of the effective date of this ORDER, the bank shall formulate and implement a written plan of action directed at lessening the Bank's risk position in each line of credit or other asset subject to Special Mention as of February 19, 2002. The plan shall include an action plan for obtaining current financial information and collateral information for each line of credit.

   (e) As used in Paragraph 6, the word "reduce" means (1) to collect, (2) to charge-off, or (3) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.

   [.7]7. (a) Beginning with 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 has any loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss" or "Doubtful" and is uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in
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   cash of interest due from the borrower) any credit already extended to any borrower.

   (b) Beginning with the effective date of this ORDER, the Bank shall not make any further extensions of credit, directly or indirectly, to any borrower whose loans are adversely classified "Substandard" as of February 19, 2002, without prior approval by the Bank's board of directors after the board's affirmative determination, as reflected in the minutes of the meeting, that the extension of credit is in full compliance with the Bank's loan policy, that the extension of credit is necessary to protect the Bank's interest or is adequately secured, that credit analysis has determined the customer to be creditworthy, and that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title, and lien documents.

   (c) Beginning with the effective date of this ORDER, the Bank shall not renew any loan without the full collection of interest due. The issuance of separate notes to the borrowing customer or a third party, the proceeds of which pay interest due, shall not satisfy the requirements of this paragraph unless these separate notes receive prior board approval in the same manner as outlined in Paragraph 7(b).

   (d) This paragraph shall not prohibit the bank from extending funds pursuant to a valid pre-existing loan commitment or unfunded letter of credit to any borrower whose other loans are adversely classified as of February 19, 2002, provided all necessary loan documentation is on file for such borrower, including current financial and cash flow information and satisfactory appraisal, title, and lien documents.

   (e) If any borrower, whose loans are adversely classified as of February 19, 2002, has a pre-existing loan commitment or unfunded letter of credit with the bank, and such commitment or letter of credit expires, it shall not be renewed or extended unless the bank complies with the provisions of Paragraph 7(a) or (b), respectively, as appropriate.

   [.8]8. (a) Within 60 days from the effective date of this ORDER, the Bank shall review its written loan policy and make whatever changes may be necessary to provide for the safe and sound administration of all aspects of the lending function.

   (b) The Bank shall ensure, at a minimum, that the policy shall:

       (i) Clearly define each individual loan officer's lending limit;

       (ii) Identify the responsibility of the board of directors, or its designated committee, in reviewing, ratifying, or approving loans;

       (iii) Provide guidelines for the collection and maintenance, prior to the disbursement of loan proceeds or the renewal of existing loans, of proper and adequate loan documentation, including, but not necessarily limited to, documents necessary to perfect the Bank's lien position, evaluate its lien priority, and provide a supportable valuation for all collateral pledged;

       (iv) Provide guidelines for the maintenance and review of complete and current credit files on each borrower, including, but not necessarily limited to, current financial information that is adequate to support the outstanding indebtedness of each borrower, which financial information may include detailed balance sheets, profit and loss statements, complete copies of recent tax returns, cash flow projections, and recent credit reports;

       (v) Provide guidelines for the identification of primary and secondary sources of repayment for each extension of credit;

       (vi) Require the establishment of, and adherence to, realistic amortization programs;

       (vii) Identify guidelines that establish criteria for granting renewals and extensions of loans, including the required use of written extension agreements; quarterly management reports that indicate which loans have been extended, the length of the extension, whether interest was paid current, and the loan officer responsible for approving the extension; and an annual loan extension report which shall be presented to the Bank's board of directors, or its designated committee, for review and documentation in the minutes;

       (viii) Limit the amount advanced in relation to the value of the collateral;

       (ix) Require collateral valuations performed by an independent party or supported by purchase invoices for each type of secured loan;

       (x) Provide guidelines for obtaining and reviewing real estate appraisals, as well as ordering reappraisals when needed;
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       (xi) Provide guidelines for appropriate and adequate collection procedures including, but not limited to, actions to be taken against borrowers who fail to make timely payments;

       (xii) Identify guidelines addressing the Bank's loan review and grading system ("Watch List");

       (xiii) Provide guidelines addressing the Bank's review of the allowance for loan and lease losses;

       (xiv) Require prior approval of loans to directors, officers, and principal shareholders and their related interests in compliance with applicable laws and regulations;

       (xv) Require proper, adequate, written loan documentation or evidence thereof as required by sound banking practices, and prior approval of the Bank's board of directors for any deviation from the loan policy before disbursement of the loan proceeds to borrowers or before renewal or extensions of existing loans; and

       (xvi) Identify procedures for allowing exceptions to the loan policy.

   (c) Evidence of the review and establishment of procedures to ensure compliance with the loan policy shall be reduced to writing. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   (d) Within 90 days from the effective date of this ORDER, the board of directors shall develop a written plan for the making of real estate construction loans, consisting of goals and strategies for minimizing the inherent risks of this type of lending by controlling disbursements and collateral margins and assuring timely completion of the projects and timely repayment of the Bank's loans. The written real estate construction loan plan shall include, at a minimum:

       (i) Guidelines to ensure that the Bank investigates the character, expertise, and breaches of financial standing of any person (and any related parties) seeking a real estate construction loan from the Bank;

       (ii) Maintenance of documentation files including background information concerning the reputation, work and credit experience for the developers or contractors, and also obtaining draw inspection reports, lot releases, appraisals, and insurance policies;

       (iii) Require that before entering into any real estate construction financing agreements, the Bank, builder, and property owner shall enter into a written building loan agreement that specifies the performance of each party during the entire course of construction and is backed by a purchase or takeout agreement from a financially responsible permanent lender;

       (iv) Guidelines for the disbursement of loan funds appropriate to the type of project financed, including procedures to ensure that all funds advanced are used properly to complete construction or development of the property serving as collateral; and

       (v) Ensure that the Bank has retained sufficiently trained personnel to monitor real estate construction loans before it extends any such loans.

   (e) Evidence of the review and establishment of procedures to ensure compliance with the construction loan plan shall be reduced to writing. The construction loan plan shall be submitted to the Regional Director and Commissioner for review and comment. The implementation of the construction loan plan shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   (f) Beginning with the effective date of this ORDER, the Bank shall initiate and implement a program to strengthen its credit files and correct the technical exceptions as detailed on pages 58–60 of the February 19, 2002, Report of Examination. In all future operations, the Bank shall ascertain that all documents or evidence thereof, properly completed, are obtained before credit is extended.

   [.9]9. (a) Within 30 days of the effective date of this ORDER, the board shall establish an internal loan review and grading system ("System") to periodically review the Bank's loan portfolio and identify and categorize problem credits. At a minimum the System shall provide for:

       (i) The identification of the overall quality of the loan portfolio;

       (ii) The identification and amount of each delinquent loan;

       (iii) An identification or grouping of loans that warrant the special attention of management;
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       (iv) For each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the reason(s) why the particular loan merits special attention;

       (v) An identification of credit and collateral documentation exceptions;

       (vi) The identification and status of each violation of law, rule, or regulation;

       (vii) An identification of loans not in conformance with the Bank's lending policy, and exceptions to the Bank's lending policy;

       (viii) An identification of insider loan transactions; and

       (ix) A mechanism for reporting periodically, no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.

   (b) A copy of the reports submitted to the board, as well as documentation of the action taken by the Bank to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.

   (c) Within 60 days from the effective date of this ORDER the Bank's board of directors shall establish and appoint a loan committee to review and approve in advance all extensions of credit, and/or renewals that when aggregated with all other extensions of credit to that borrower, either, directly or indirectly, exceed or would exceed $100,000. The review should include financial, income, and cash flow information, collateral values and lien information, repayment terms, past performance by the borrower, the purpose of the extension, and whether the extension complies with the Bank's loan policy and applicable laws, rules and regulations. The loan committee shall meet at least twice monthly and shall maintain written minutes which detail the information reviewed by the loan committee, its conclusions, approvals, denials, recommendations, and reasons for the approval of any credit which does not fully comply with the review requirements set forth in this paragraph. At least monthly, the loan committee shall submit its written minutes to the board of directors. At least one half of the members of the loan committee shall be independent, outside directors as defined in Paragraph 1(e) of this ORDER.

   [.10]10. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law or regulation as well as all contraventions of policy statements that are set out on pages 23–29 of the Report of Examination of the Bank as of February 19, 2002. In addition, the Bank shall henceforth comply with all applicable laws, regulations, and policies.

   [.11]11. Within 60 days from the effective date of this ORDER, the Bank shall review its written liquidity and funds management policy and make whatever changes may be necessary to include the establishment of acceptable ranges of ratios in the following areas: volatile liability dependence, total loans to total deposits, and temporary investments to volatile liabilities. In addition, the liquidity policy and funds management policy shall incorporate a funds management program which designates acceptable levels for: volatile liabilities, including borrowings; asset mix, including temporary funds and investments, long-term investment securities and classes of obligors, and loans to deposits; and rate-sensitive assets as a percent of rate-sensitive liabilities. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.12]12. Within 60 days from the effective date of this ORDER, the Bank shall review its written asset/liability management policy and make whatever changes may be necessary to detail the form and manner by which the Bank will improve its interest rate risk management system and monitoring program, including validation of model assumptions. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.13]13. Within 60 days from the effective date of this ORDER, the Bank shall review its investment policy and make whatever changes may be necessary to detail the board's investment goals, authorized activities and instruments, internal controls and independent review, selection of broker/dealers, risk limits and portfolio diversification, maturity distribution, risk and performance measurements, reporting, quality
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   designations, and accounting guidelines. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.14]14. (a) Within 30 days from the effective date of this ORDER, the Bank shall review all Consolidated Reports of Condition and Income filled with the FDIC on and after December 31, 2001, and shall amend and file with the FDIC amended Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the date of each such Report.

   (b) In addition to the above, and during the life of this ORDER, the Bank shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the breaches of financial condition of the Bank as of the reporting period. In particular, such Reports shall include any adjustment in the Bank's books made necessary or appropriate as a consequence of any State or FDIC examination of the Bank during that reporting period.

   [.15]15. White this ORDER is in effect, the Bank shall not declare or pay any cash dividends on its capital stock without the prior written approval of the Regional Director and the Commissioner.

   [.16]16. Within 90 days from the effective date of this ORDER, the Bank shall develop a written internal audit plan ("Audit Plan") that, at a minimum, complies with the Interagency Policy Statement on the Internal Audit Function and its Outsourcing. The Bank's board of directors shall appoint an audit committee. At least one half of the members of such committee shall be independent, outside directors as that term is defined in Paragraph 1(e). The audit committee shall report monthly to the Bank's board of directors. The audit committee report shall be maintained as part of the minutes of the meetings of the board of directors. Copies of the Audit Plan shall be submitted to the Regional Director and the Commissioner. The Audit Plan and its implementation shall be in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.17]17. 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 the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Accounting & Securities Unit, 550 17th Street, N.W., Room F-6043, 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.

   18. On the fifteenth day of the second month following the effective day of this ORDER, and on the fifteenth day of every third month thereafter, 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 further reports.

   19. The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Bank.

   20. This ORDER shall become effective 10 days from the date of its issuance.

   21. 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: August 5, 2002

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