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FDIC Enforcement Decisions and Orders



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   [12,004] In the Matter of Jasper State Bank, Jasper, Minnesota, Docket No. 02-153b (12-19-02).

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 8-4-05; see ¶16,432.)

   [.1] Management—Qualifications Specified

   [.2] Capital—Maintain Tier 1 Capital

   [.3] Dividends—Dividends Restricted

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

   [.5] Assets—Charge-off or Collection

   [.6] Assets—Adversely Classified Assets—Reduction Required

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

   [.8] Loan Committee—Duties Specified

   [.9] Loan Policy—Preparation or Revision of Policy Required
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   [.10] Report of Examination—Correction of Exceptions Required

   [.11] Concentration of Credit—Reduce

   [.12] Funds Management and Liquidity—Written Plan Required

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

   [.14] Profit Plan—Preparation of Plan Required

   [.15] Audit—Required

   [.16] Bank Operations—Internal Controls, Correction of Weaknesses Required

   [.17] Bank Operations—Information Systems—Correction of Weaknesses Required

   [.18] Reports of Condition and Income—Complete in Accordance with Instructions

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

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

   [.21] Board of Directors—Compliance with Cease and Desist Order—Written Progress Reports Required

In the Matter of
JASPER STATE BANK
JASPER, MINNESOTA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-02-153b

   Jasper State Bank, Jasper, Minnesota ("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, as well as 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 having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") dated December 11, 2002, with counsel for the Federal Deposit Insurance Corporation ("FDIC"), whereby, solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices and violations of law and regulation, 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 violations of law and regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as 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 regulations:

   A. Operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits.

   B. Operating with a board of directors that has failed to provide adequate supervision over and direction to the management of the Bank.

   C. Operating with an inadequate level of capital protection for the kind and quality of assets held.

   D. Operating with an inadequate allowance for loans and lease losses for the volume, kind, and quality of loans and leases held.

   E. Engaging in hazardous lending and lax collection practices, including, but not limited to:

       1. the failure to obtain proper loan documentation;
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       2. the failure to obtain adequate collateral;

       3. the failure to establish and monitor collateral margins of secured borrowers;

       4. the failure to establish and enforce adequate loan repayment programs;

       5. the failure to obtain current and complete financial information;

       6. the extension of credit with inadequate diversification of risk; and

       7. other poor credit administration practices.

   F. Operating with an excessive level of adversely classified loans or assets, and/or delinquent loans and/or non-accrual loans.

   G. Failing to comply with the loan policy.

   H. Operating with inadequate liquidity in light of the Bank's asset and liability mix.

   I. Operating with an inadequate asset/liability and/or funds management policy.

   J. Operating with inadequate internal routines and controls.

   K. Operating with an inadequate audit program.

   L. Failing to keep accurate books and records.

   M. Operating with inadequate information technology policies and procedures.

   N. Violating laws and/or regulations, including:

       1. the legal lending limit restrictions of the State of Minnesota as set forth in Minnesota Statute 48.24;

       2. the more than normal risk of repayment prohibition(s) of section 215.4(a)(1) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.4(a)(1);

       3. the prior approval requirements for loans to bank insiders as set forth in section 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.4(b); and

       4. the overdraft restrictions of section 215.4(e) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.4(e).

   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1]1. MANAGEMENT  For purposes of this Order, the qualifications of management shall be assessed on its ability to comply with the requirements of this ORDER, operate the Bank in a safe and sound manner, comply with applicable laws and regulations, and restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, liquidity, and sensitivity to market risk. Furthermore, "senior executive officer" shall be defined as in section 32 of Act, 12 U.S.C. §1831(i), and section 303.101(b) of the FDIC Rules and Regulations, 12 C.F.R. §303.101(b). Each member of Bank management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank.

   a. During the life of this ORDER, the Bank shall notify the Regional Director and the Commissioner of Commerce, in writing, of the resignation or termination of any of the Bank's directors or senior executive officers.

   b. 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, supra, and Subpart F of Part 303 of the FDIC Rules and Regulations, 12 C.F.R. §303.100-303.104.

   c. Within 120 days from the effective date of this ORDER, the Bank shall have and retain qualified management, who shall be provided the necessary written authority to implement the provisions of this ORDER. At a minimum, such management shall include:

       i. a chief executive officer with proven ability in managing a bank of comparable size and complexity, as well as experience in upgrading a low quality loan portfolio;

       ii. a 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; and

       iii. an information technology system administrator.

   d. Within 60 days from the effective date of this ORDER, the Bank shall develop and complete a plan ("Management Plan") for the purpose of providing qualified management for the Bank.

   e. The Management Plan shall include, at a minimum:

       i. identification of both the type and number of officer positions needed to properly
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       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 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 to 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 previously in this ORDER.

   f. Upon completion of the Management Plan, it shall be submitted to the Regional Director and the Commissioner of Commerce for review and comment. Within 30 days of the receipt of any comments, and after due consideration of any recommended changes, the board of directors of the Bank shall meet, approve the Management Plan, and record the approval in its minutes for the meeting. Any subsequent modification of the Management Plan shall require submission to the Regional Director and the Commissioner of Commerce for review and comment prior to approval by the Bank. Thereafter, the Bank, its directors, officers and employees shall implement and follow the approved Management Plan.

   [.2]2. CAPITAL ADEQUACY  For purposes of this ORDER, "capital ratio" means the level of Tier 1 capital as a percentage of total assets. 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.

   a. After appropriate entries for an adequate allowance for loan and lease losses ("ALLL") are made in accordance with the requirements of this Order, but no later than 30 days from the effective date of this Order, the Bank shall have and maintain a capital ratio of at least 7 percent.

   b. Within 60 days from the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner of Commerce, describing the means by which the Bank shall maintain its capital ratio at 7 percent. Within 30 days of the receipt of any comments, and after due consideration of any recommended changes, the board of directors of the Bank shall meet, approve the plan and record the approval in the minutes for the meeting. Any subsequent modification of the plan shall be submitted to the Regional Director and the Commissioner of Commerce for review and comment prior to approval by the Bank. Thereafter, the Bank, its directors, officers, and employees shall implement and follow the plan.

   c. Any increases in Tier 1 capital may be accomplished by the following:

       i. the sale of common stock and non-cumulative perpetual preferred stock;

       ii. the elimination of all or part of the assets classified "Loss" as of May 2, 2002, without incurring 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

       vi. any combination of the above.

   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
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   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, Room F-6043, N.W., Washington, D.C. 20429, for its review. Any changes to be made in the materials requested by the FDIC shall be made prior to their dissemination. If the Regional Director allows any part of the increase in Tier 1 capital to be provided by the sale of non-cumulative 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 convertibility factor, shall be presented to the Regional Director for prior approval.

   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 of other changes that 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.

   [.3]3. RESTRICTION ON DIVIDENDS  As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend, capital distribution or earnings distribution, without the prior written consent of the Regional Director and the Commissioner of Commerce.

   [.4]4. ALLOWANCE FOR LOAN AND LEASE LOSSES  For purposes of this ORDER and in making the determinations mandated by this paragraph, the board of directors of the Bank shall consider the Federal Financial Institutions Examination Council's Instructions for the Reports of Condition and Income, the Interagency Statement of Policy on the Allowance of Loan and Lease Losses and any analysis of the Bank's ALLL provided by the FDIC.

   a. Prior to the submission 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 ALL, 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 ALLL recommended, if any, and the basis for determination of the amount of ALLL provided.

   b. The ALLL entries required by this paragraph shall be made prior to any Tier 1 capital determinations required by this ORDER.

   [.5]5. ASSET CHARGE-OFF  Elimination or reduction of assets with the proceeds of other Bank extensions of credit is not considered collection for the purpose of this paragraph. 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 May 2, 2002, that have not been previously collected or charged off.

   [.6]6. REDUCTION OF SUBSTANDARD AND DOUBTFUL ASSETS  For purposes of this ORDER and as used in this paragraph, "reduce" means to collect, charge off, or improve the quality of "Substandard" and "Doubtful" assets so as to warrant removal of any adverse classification by the FDIC. Furthermore, in developing the plan mandated by this paragraph, the Bank shall, at a minimum, review the financial position of each such borrower, including source or repayment, repayment ability, and alternative repayment sources, and evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.

   a. Within 90 days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner of Commerce, for review and comment, a written plan to reduce the Bank's risk position in each asset in excess of $50,000 which is classified "Substandard" or "Doubtful" in the FDIC's Report of Examination as of May 2, 2002. Within
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   30 days from the receipt of any comment, and after due consideration of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. Therefore, the Bank shall implement and follow this plan.

   b. The plan mandated by this paragraph shall include, but not be limited to, the following:

       i. the dollar levels to which risk in each classified asset will be reduced;

       ii. a description of the risk reduction methodology to be followed;

       iii. provisions for the Bank's submission of quarterly written progress reports to its board of directors;

       iv. provisions mandating board review of said progress reports; and

       v. provisions for the mandated review to be recorded by notation in the minutes of the board of director's meetings.

   [.7]7. PROHIBITION OF ADDITIONAL LOANS TO CLASSIFIED BORROWERS  As of the effective date of this ORDER, the Bank shall not, directly or indirectly, extend 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 (or portion thereof) that has been charged-off the books of the Bank or classified "Loss", so long as such credit remains uncollected. Additionally, the Bank shall not, directly or indirectly, extend any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Substandard" or "Doubtful," or is listed for Special Mention, in the most recent regulatory examination report and remains uncollected, unless its board of directors, or its designated committee, adopts a detailed written statement giving the reasons why such potential action is in the best interest of the Bank. A copy of such statement shall be placed in the appropriate loan file and shall be incorporated in the minutes of the applicable board of directors' meeting.

   [.8]8. LOAN COMMITTEE  As of the effective date of this ORDER, the Bank's directors' loan committee shall meet on a regular basis. The loan committee shall include at least one director who:

    •    is not an officer of the Bank, any subsidiary, or any of its affiliated organizations;

    •    does not own more than 10 percent of the outstanding shares of the Bank; and

    •    is not indebted to the Bank directly or indirectly, including the indebtedness of any entity in which the individual has a substantial financial interest, in an amount exceeding 5 percent of the Bank's total Tier 1 capital and allowance for loan and lease losses.

   a. The loan committee shall, at a minimum, perform the following functions:

       i. evaluate, grant and/or approve loans in accordance with the Bank's loan policy as amended to comply with this ORDER;

       ii. provide a thorough written explanation of any deviations from the loan policy which shall:

         (A) address how such exceptions are in the Bank's interest;

         (B) be included in the minutes of the corresponding committee meeting; and

         (C) be maintained in the borrower's credit file.

       iii. review and monitor the status of repayment and collection of overdue and maturing loans, of all loans classified "Substandard" or "Doubtful" in the FDIC's Report of Examination as of May 2, 2002, or subsequent regulatory examination, and of all loans included on the Bank's internal watch list;

       iv. review and give prior written approval for all advances, renewals, or extensions of credit to any borrower or the borrower's related interests when the aggregate volume of credit extended to the borrower and its "related interests", as such term is defined in section 215.2(n) of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. §215.2(n)), exceeds $25,000;

       v. review all applications for new loans and renewals of existing loans to Bank directors, executive officers, and their related interests, and issue a written opinion as to whether the credit is in conformance with the Bank's loan and conflicts of interest (or ethics) policies, as well as all applicable laws and regulations;

       vi. maintain written minutes of the committee meetings, including a record of the review and status of the loans considered.

   b. All loan committee minutes shall be
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   made available to the Bank's board of directors at their next scheduled meeting.

   [.9]9. LOAN POLICY  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.

   a. The revisions to the Bank's loan policy required by this paragraph, at a minimum, shall include:

       i. a provision establishing review and monitoring procedures to ensure that all lending personnel are adhering to established lending procedures and that the directorate is receiving timely and fully documented reports on loan activity, including any deviations from established policy; and

       ii. the establishment and maintenance of a loan grading system and internal watch list, which shall include all loans on the Bank's books as of the effective date of this ORDER that were adversely classified in the FDIC Report of Examination as of May 2, 2002.

   b. The revised written loan policy shall be submitted to the Regional Director and the Commissioner of Commerce, for review and comment, before its adoption. Within 30 days from the receipt of any comments, and after due consideration 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 loan policy.

   [.10]10. TECHNICAL EXCEPTIONS  Within 90 days from the effective date of this ORDER, the Bank shall correct the technical exceptions listed in the FDIC Report of Examination as of May 2, 2002. "Correct" shall include documented attempts to collect missing information. The Bank shall initiate and implement a program to ensure its credit files contain complete, adequate and current documentation.

   [.11]11. REDUCTION OF CONCENTRATIONS OF CREDIT  Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan to reduce each of the concentrations of credit identified in the FDIC's Report of Examination as of May 2, 2002.

   a. The plan shall prohibit any additional advances that would increase the concentrations or create new concentrations and shall include, but not be limited to:

       i. dollar levels to which the Bank shall reduce each concentration within 3 and 6 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.

   b. A copy of the written plan shall be submitted to the Regional Director and the Commissioner of Commerce upon its completion. Thereafter, the Bank shall implement and follow the plan.

   [.12]12. FUNDS MANAGEMENT PLAN  Within 60 days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner of Commerce, for review and comment, a written plan addressing liquidity, contingent funding, and asset liability management. Within 30 days from the receipt of all such comments, and after due consideration of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow the plan. Annually during the life of this ORDER, the Bank shall review this plan for adequacy and, based upon such review, shall make appropriate revisions to the plan that are necessary to strengthen funds management procedures and maintain adequate provisions to meet the Bank's liquidity needs.

   a. The initial plan shall include, at a minimum, provisions:

       i. establishing a desirable range for dependence on less stable funding sources;

       ii. identifying the source and use of borrowed and/or non-core funds;

       iii. establishing parameters for borrowing federal funds, including limits concerning dollar amounts, maturities, and authorized sources/lenders;

       iv. addressing circumstances under which the Bank will rely on borrowed funds, including restrictions thereon;

       v. establishing appropriate lines of credit that would allow the Bank to borrow funds to meet depositor demands if the Bank's
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       other provisions for liquidity proved to be inadequate;

       vi. requiring the retention of securities and/or other identified categories of investments that can be liquidated within the next business day in amounts sufficient (as a percentage of the Bank's total assets) to ensure the maintenance of the Bank's liquidity posture at a level consistent with short- and long-term liquidity objectives; and

       vii. establishing contingency plans to improve liquidity to the level established in the Bank's liquidity policy.

   [.13]13. FUNDS MANAGEMENT POLICY  Within 60 days from the effective date of this ORDER, and annually thereafter, the board of directors of the Bank shall review the Bank's funds management policy for adequacy and shall make the necessary revisions to address the Bank's asset/liability and liquidity positions and strategies.

   a. At a minimum, the revised policy shall:

       i. provide for the establishment of an asset/liability committee;

       ii. provide for the periodic review of the bank's deposit structure;

       iii. provide policies and procedures that address funding concentration in or excessive reliance on any single source or type of funding, such as brokered funds, deposits obtained through the Internet or other types of advertising, and other similar rate sensitive or credit sensitive deposits;

       iv. provide a method of computing the bank's cost of funds;

       v. convey the board's risk tolerance and establishing target liquidity ratios such as loan-to-deposit ratio, longer-term assets funded by less stable funding sources, individual and aggregate limits on borrowed funds by type and source, or a minimum limit on the amount of short-term investments;

       vi. provide an adequate system of internal controls that ensures the independent and periodic review of the liquidity management process, and compliance with policies and procedures;

       vii. ensure that senior management and the board are given the means to periodically review compliance with policy guidelines, such as compliance with established limits and legal reserve requirements, and verify that duties are properly segregated;

       viii. include a contingency plan that addresses alternative sources of funds if initial projections of funding sources and uses are incorrect or if a liquidity crisis arises;

       ix. establish a process for measuring and monitoring liquidity;

       x. define approval procedures for exceptions to policies, limits, and authorizations;

       xi. provide authority procedures to access wholesale funding sources, and defining and establishing a process for measuring and monitoring unused borrowing capacity;

       xii. conform with the Interagency Statement of Policy on Interest Rate Risk;

       xiii. establish a method to measure/monitor rate sensitivity;

       xiv. establish an acceptable range for the relationship between rate sensitive assets and rate sensitive liabilities; and

       xv. establish acceptable parameters for changes in the economic value of Equity and Net Interest Margin given changing interest rate scenarios.

   b. The Bank's policy, when revised as required by this paragraph, shall be submitted to the Regional Director and the Commissioner of Commerce for review and comment. Within 30 days from the receipt of any recommended changes, the Bank shall approve the policy, which approval shall be recorded in the minutes of the board of director's meeting. Thereafter, the Bank shall implement and follow the policy.

   [.14]14. PROFIT PLAN AND BUDGET  The plan and budget 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, as well as a description of the operating assumptions that form the basis for major projected income and expense components.

   a. Within 60 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 years 2003, 2004, and 2005. A copy of the plan and budget shall be submitted to the Regional Director and the Commissioner of Commerce upon their completion.
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   Thereafter, the Bank shall implement and follow the plan and budget.

   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 against them, 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. A written profit plan and budget shall be prepared for each calendar year for which this ORDER is in effect.

   [.15]15. AUDITS  Within 90 days from the effective date of this ORDER, the Bank shall engage an external audit of its financial statements and operating procedures, including the Bank's information technology operations, to be performed by an independent public accounting firm acceptable to the Regional Director and the Commissioner of Commerce. During the life of this ORDER, the Bank shall forward copies of any external audit reports required by this paragraph with the engagement letter to the Regional Director and the Commissioner of Commerce within 10 days from the Bank's receipt of such reports.

   a. Within 120 days from the effective date of this ORDER, the Bank's board of directors shall formulate and submit to the Regional Director and the Commissioner of Commerce, for review and comment, a comprehensive written audit program which shall include, at a minimum:

       i. an external audit of its financial statements and operations, including information technology operations;

       ii. procedures for internal audits of its financial statements and operations, including information technology operations; and

       iii. training for internal auditors.

   b. Within 30 days from the receipt of any such comments, and after due consideration of any recommended changes, the Bank shall approve the audit program, which approval shall be recorded in the minutes of the board of directors' meeting. The Bank shall thereafter implement and enforce an effective system of internal and external audits. The internal auditor shall make written monthly reports of audit findings directly to the Bank's board of directors. The minutes of the meetings of the board of directors shall reflect consideration of these reports and describe any action taken as a result thereof.

   [.16]16. INTERNAL ROUTINES AND CONTROLS  Within 90 days from the effective date of this ORDER, the Bank shall correct the deficiencies in internal routines and controls, which are listed in the FDIC's Report of Examination as of May 2, 2002. Additionally, policies and procedures shall be established to prevent the recurrence of any deficiencies noted.

   [.17]17. INFORMATION SYSTEM DEFICIENCIES  Within 90 days from the effective date of this ORDER, the Bank shall correct the deficiencies in its information technology system, which are listed in the FDIC's Report of Examination - Information Systems as of August 12, 2002. Additionally, policies and procedures shall be established to prevent the recurrence of any deficiencies noted.

   [.18]18. CALL REPORTS  During the life of this ORDER, the Bank shall file with the FDIC Consolidated Reports of Condition and Income that accurately reflect the 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.

   [.19]19. VIOLATIONS OF LAW AND REGULATION  Within 60 days from the effective date of this ORDER, the Bank shall:

       a. eliminate and/or correct all violations of law and regulation listed in the FDIC's Report of Examination as of May 2, 2002; and

       b. implement procedures to ensure future compliance with all applicable laws and regulations.

   [.20]20. DISCLOSURE TO SHAREHOLDERS  Following the effective date of this ORDER, the Bank shall send to its shareholders, or otherwise furnish a description of this ORDER, in conjunction with the Bank's next shareholder communication, and 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, notice or statement shall be sent to the FDIC Registration and Disclosure Section, 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429 for review at least 20 days prior to
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   dissemination to shareholders. Any requests for changes made by the FDIC shall be made prior to dissemination of the description, communication, notice or statement.

   [.21]21. PROGRESS REPORTS  Within 30 days from the end of each calendar quarter following the effective date of this ORDER, the Bank shall furnish written progress reports to the Regional Director and the Commissioner of Commerce, signed by each member of the Bank's board of directors, detailing the form and manner of any actions taken to secure compliance with this ORDER. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has, in writing, released the Bank from making further reports.

   The effective date of this ORDER shall be 10 days after its issuance by the FDIC.

   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.

   Issued Pursuant to Delegated Authority.

   Dated: December 19th, 2002.



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