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FDIC Enforcement Decisions and Orders



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   [12,067] In the Matter of First State Bank, Holly Springs, Mississippi, Docket No. 03-078b (7-16-03).

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent was engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 8-9-05; see ¶16,433.)

   [.1] Management—Qualifications Specified

   [.2] Board of Directors—Review Management Actions

   [.3] Capital—Maintain Tier 1 Capital

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

   [.5] Profit Plan and Budget—Preparation of Plan Required

   [.6] Ethics—Ethics Program Required

   [.7] Conflicts of Interest—Written Policy Required

   [.8] Assets—Charge-off or Collection

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

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

   [.11] Loan Review and Grading System—Establishment of Required

   [.12] Loan Policy—Adherence to Required

   [.13] Loan Policy—Final Payment

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

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

   [.16] Bank Operations—Written Policy Required

   [.17] Security Controls—Independent Officer Required

   [.18] Dividends—Dividends Restricted

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

   [.20] Progress Report—Written Report Required

In the Matter of
FIRST STATE BANK
HOLLY SPRINGS, MISSISSIPPI
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-03-078b

   First State Bank ("Bank"), Holly Springs, Mississippi 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 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 16, 2003, 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 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
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   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 a large volume of poor quality loans;

       (c) operating with an inadequate loan valuation reserve;

       (d) operating with inadequate internal routine and controls policies;

       (e) operating in such a manner as to produce operating losses;

       (f) operating with inadequate provisions for liquidity and rate sensitivity;

       (g) operating in violation of sections 215.4, 215.5, 215.6, 215.8 and 215.9 of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.4, 215.5, 215.6, 215.8 and 215.9 made applicable to state nonmember banks by section 18(j)(2), 12 U.S.C. §1828(j)(2); in violation of Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. §323; in violation of Part 365 of the FDIC's Rules and Regulations, 12 C.F.R. §365; in violation of Section 103.29(a) of the Treasury Department's Financial Recordkeeping and Reporting of Currency and Foreign Transactions Regulation, 31 C.F.R. §103.29(a); in contravention of Part 364 of the FDIC's Rules and Regulations, Standards for Safety and Soundness, 12 C.F.R. §364; in contravention of the Interagency Policy Statement on the Allowance for Loan and Lease Losses, FDIC Financial Institutions Letter 89–93; in contravention of the Joint Agency Policy Statement on Interest Rate Risk, 61 Fed. Reg. 33169; in contravention of the Uniform Retail Credit Classification and Account Management Policy Statement 64 Fed. Reg. 6655-01; in contravention of the Interagency Policy Statement on Appraisal and Evaluations Guidelines, FDIC Financial Institution Letter 74–94 (1994), and in violation of Section 81-1-91 of the Mississippi Code Miss. Statutes;

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

       (i) 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, a chief operations officer and an experienced senior lending officer responsible for supervising the Bank's overall lending function.

   (b) Present management shall be assessed on its ability to:

       (i) Comply 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 risks; and

       (iii) Comply with all applicable State and Federal laws and regulations.

   (c) (i) During the life of this ORDER, the Bank shall notify the Regional Director of the Dallas Region-Memphis Area Office ("Regional Director") and the Commissioner of the Department of Banking and Consumer Finance for the State of Mississippi ("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.

   (ii) The Bank shall comply with section 32 of the Act, 12 U.S.C. §1831i, and shall notify 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 two-thirds 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
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   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 five (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 five (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.

   [.2]2. (a) Within 120 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 executive administration, lending and operations areas. 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; identify the number and type of positions needed to properly supervise the bank's operations and maintain appropriate internal operating controls; and identify the number and type of executive staff necessary to effectively implement a satisfactory risk management system, giving appropriate consideration to the size and complexity of the bank;

       (ii) Provide a clear and concise description of the general duties and responsibilities for Bank officers and their support staff;

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

       (iv) Provide an evaluation of the Bank's chief executive officer, senior lending officer, and chief operating officer, indicating whether these Bank officials possess the necessary experience and qualifications required to adequately perform present and anticipated duties given the Bank's size, complexity, and financial condition;

       (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 the Bank's management and updating of lending and operations 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 bank administration, lending, collections, operations, 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 150 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/or active management of the Bank and the time frames for each action.

   (d) Within 150 days of the effective date of this ORDER, the board of directors shall prepare a written report ("Written Report") which shall:

       (i) contain a recitation identifying the recommendations made by the outside consultant(s) which have been incorporated in the Management Report and Plan;

       (ii) 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

       (iii) 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
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   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) Beginning with the effective date of this ORDER, the Bank shall have Tier I capital equal to or greater than seven and one half percent (7 1/2%) of the Bank's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Bank shall maintain Tier I capital equal to or greater than seven and one half percent (7 1/2%) of the Bank's adjusted Part 325 total assets. The Tier I capital required under this paragraph shall be the minimum capital required under Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325.

   (b) Any increase in Tier I capital necessary to meet the ratio required by 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 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, & Securities Unit, 550 17th Street, N.W., Room F-6053, 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(v), and 325.2(x), 12 C.F.R. §§ 325.2(v) and (x). The "Capital Calculations" schedule on page 121 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 or Holding Company stock or to any investor by any other means for any portion of any increase in Tier I capital required herein.

   [.4]4. (a) Beginning with the effective date of this ORDER, the Bank shall establish and thereafter maintain, through charges to current
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   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) Prevailing instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions—Consolidated Reports of Condition 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) General and local economic conditions affecting the collectibility of the Bank's loans;

       (vi) 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) Off balance sheet credit risks; and

       (viii) Any 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, beginning with the effective date of this ORDER, the Bank shall achieve a valuation reserve for loan and lease losses, after charge off of loans classified "Loss" as required in Paragraph 8(a) below, of not less than $4,133,000.00 and shall thereafter maintain, through charges to 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.

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

   [.5]5. (a) Within 90 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 profit plan ("Profit Plan") consisting of goals and strategies for improving the earnings of the Bank for each calendar year. The 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 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. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt, and implement a written ethics policy and procedure with regard to the ethical conduct and other standards of conduct and responsibilities for its directors, officers, employees, agents, and other persons participating in the conduct of the affairs of the Bank ("Ethics Program"). At a minimum the Ethics Program shall address the following:
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   (a) Ethical and other conduct and responsibilities of individuals in the use of official Bank information; preferential treatment for Bank employees or their relatives; and indebtedness to the Bank or any other financial institution.

   (b) The financial interests and obligations of individuals that appear to conflict with that individual's duties and responsibilities such as participating in any manner in any transaction or loan in which the individual, his spouse, child, partner, or organization is involved; or in which the individual serves as an officer, director, trustee, partner, or employee, or has a financial interest or has been granted a power of attorney.

   (c) A periodic written method of reporting each individual's compliance with the Ethics Program to an Ethics Counselor and/or committee who shall review compliance with the Ethics Program and report his findings to the board of directors.

   [.7]7. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt, and implement written policies and procedures designed to bring to the attention of each member of the board conflicts of interest which may exist in approving loans or other transactions in which officers, directors, or principal stockholders of the Bank ("Insiders") are involved. Such policies and procedures shall, at a minimum, ensure that each member of the board has been apprised of any potential conflict prior to making a decision and has acted specifically on any loan or other transaction in which Insiders and/or their business associates are, directly or indirectly, involved. The results of board deliberations as to potential conflicts shall be reflected in the minutes of the meeting.

   [.8]8. (a) Beginning with the effective date of the ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of September 30, 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 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 reducing the Bank's risk position in each line of credit which was classified "Substandard" or "Doubtful" as of September 30, 2002 and which aggregated $500,000 or more, and a written plan of action directed at reducing the Bank's risk position in each insider related line of credit identified in the Report of Examination as of September 30, 2002 as relationship number 100246 in the aggregate amount of $241,000; relationship number 203152 in the aggregate amount of $120,000; relationship number 600414 in the aggregate amount of $81,000; relationship number 114711 in the aggregate amount of $213,000; relationship number 500686 in the aggregate amount of $190,000; and as relationship number 201554 in the aggregate amount of $318,000, all of which were adversely classified as of September 30, 2002. Such written plans shall include, but not be limited to, the following:

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

       (ii) Provisions for the submissions of monthly written progress reports to the Bank's board of directors for review and recordation in the board minutes.

   (c) In addition to the foregoing, the Bank shall eventually reduce the total of all adversely classified assets. As used in Paragraphs 8(a) and 8(b), 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.

   (d) Within 90 days of the effective date of this ORDER, the Bank shall correct underwriting deficiencies or otherwise improve assets subject to Special Mention as of September 30, 2002 sufficient to warrant removal from the Special Mention category.

   [.9]9. (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 a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss" or "Doubtful" as of September 30, 2002 and remains uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest
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   due from the borrower) any credit already extended to any borrower.

   (b) Paragraph 9(a) shall not apply if the Bank's failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank. Prior to the extension of any additional credit pursuant to this paragraph, either in the form of a renewal, extension, or further advance of funds, such additional credit shall be approved by a majority of the Bank's board of directors, who shall certify, in writing:

       (i) why the failure of the Bank to extend such credit would be detrimental to the best interests of the Bank,

       (ii) that the Bank's position would be improved thereby, and

       (iii) how the Bank's position would be improved.

   The signed certification shall be made a part of the minutes of the Bank's board or designated committee, and a copy of the signed certification shall be retained in the borrower's credit file.

   (c) Beginning with the effective date of this ORDER, the Bank shall not make any further extension of credit to any borrower, thereof, whose loans in the aggregate exceed $200,000 and are adversely classified "Substandard" as of September 30, 2002, unless such extension has been approved by a majority of the Bank's board of directors in advance and the Bank's board of directors has detailed in the written minutes of the meeting how it has affirmatively determined all of the following:

       (i) That the extension of credit is in full compliance with the Bank's loan policy;

       (ii) that it is necessary to protect the Bank's interest or that the extension of credit is adequately secured;

       (iii) that based upon credit analysis, the customer is deemed to be creditworthy; and

       (iv) that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title, and lien documents. The minutes shall also include the following information about the extension of credit:

         (1) The amount adversely classified as of September 30, 2002;

         (2) the current balance;

         (3) the amount of credit requested;

         (4) a description of the collateral and its value securing the credit; and

         (5) a full description of the documentation presented to the board of directors including the date of the borrower's most recent financial information and the borrower's current income or cash flow data.

   (d) 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 9(b).

   [.10]10. 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. Specific procedures shall be included for prior approval of loans (including overdrafts) to directors, officers, and principal shareholders, and their related interests, in compliance with applicable laws and regulations. Specific procedures shall be included to ensure proper loan documentation, effective repayment programs, effective collection and charge-off procedures and overdraft extension and repayment policies and procedures. The Bank shall adopt changes it considers necessary and appropriate, and management shall reaffirm its intent to comply with the policy, as amended. Changes shall reflect consideration and implementation of loan underwriting and credit administration recommendations contained in the Report of Examination, as detailed on the Examination Conclusions and Comments pages and in the Risk Assessment Section item 2. Evidence of management's reaffirmation shall be reduced to writing. The policy 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.

   [.11]11. (a) Within 60 days of the effective date of this ORDER, the board shall establish an effective 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:
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       (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;

       (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 $500,000. 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 two-thirds of the members of the loan committee shall be independent, outside directors as defined in Paragraph 1(e) of this ORDER.

   [.12]12. (a) Within 60 days of the effective date of this Order, the Bank shall adopt and implement written policies and procedures to ensure that all extensions of credit and/or renewals, including the acquisition of any indirect indebtedness which directly or indirectly, aggregate $500,000 or less, shall conform to the bank's Loan Policy. These written policies and procedures shall require the originating officer to certify that the credit conforms to the bank's Loan Policy. The Bank shall develop a review program acceptable to the Regional Director and the Commissioner that will ensure that the loan, renewal, or acquisition complies with the Bank's loan policies including, but not limited to, current financial statements and current appraisals. Any exceptions to, or deviations from, the Bank's established direct or indirect lending policies, shall be noted in writing along with the name of the loan's originating officer. The Bank's Compliance Officer shall submit a written report monthly to the Bank's board of directors concerning the Bank's adherence to the loan policies, noting any exceptions to or deviations from the loan policies established by the Bank's board of directors, the loan officer responsible for the exception or deviation, and the date the exception or deviation received the Bank board of directors' approval. The report shall be made a part of the minutes of the board meeting.

   (b) Evidence of the review program 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.

   [.13]13. Beginning with the effective date of this ORDER, the Bank shall not permit final payment of any demand item on any customer account that when aggregated with all other overdrafts to that customer, exceed or would exceed, directly or indirectly, $5,000.00, unless payment of the demand
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   item has been reviewed and approved in advance by the Bank's board of directors or the loan committee established pursuant to paragraph 11(c). The board's or loan committee's review should include whether final payment of the demand item complies with the Bank's loan policy regarding overdrafts. The board of directors or loan committee shall include in the minutes of the meeting where the review is undertaken, its conclusions, approvals, denials, recommendations, and reasons for the approval of any final payment that creates an overdraft that does not fully comply with the Bank's loan policy.

   [.14]14. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law which are set out on pages 24 through 32 of the Report of Examination of the Bank as of September 30, 2002. In addition, the Bank shall henceforth comply with all applicable laws and regulations.

   [.15]15. Within 90 days from the effective date of this ORDER, the Bank shall formulate and adopt a written liquidity and funds management policy. Such policy shall 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 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 written liquidity and funds management policy shall be submitted to the Regional Director and the Commissioner for review and comment.

   [.16]16. (a) Within 120 days from the effective date of this ORDER, the Bank shall adopt and implement a written policy for the operation of the Bank in such a manner as to provide operating controls consistent with safe and sound banking practices. This policy shall provide for an organizational structure that establishes clear lines of authority and responsibility for monitoring adherence to established policies, and shall address internal controls that safeguard bank assets, provide for the accuracy and reliability of accounting data and ensure adherence to prescribed managerial policies; administrative controls that address the procedures and processes required for the authorization of transactions; and accounting controls that ensure that transactions are properly recorded to maintain accountability of bank assets; and permit the preparation of financial statements in conformity with generally accepted accounting principals.

   (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 bank accounting, auditing, and internal routine and controls to assist the board of directors in providing routine controls and practices consistent with safe and sound banking practices.

   (c) Within 150 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 addressing the findings of the consultant regarding internal routine and control practices and procedures ("Routine Controls Plan"). The Routine Controls Plan shall specify the actions to be taken by the board of directors and or active management of the Bank and the time frames for each action.

   (d) Within 150 days of the effective date of this ORDER, the board of directors shall prepare a written report ("Routine Controls Report") which shall:

       (i) contain a recitation identifying the recommendations made by the outside consultant(s) which have been incorporated in the Routine Controls Report and the Routine Controls Plan;

       (ii) a recitation identifying the recommendations made by the outside consultant(s) which were not incorporated in the Routine Controls Report or the Routine Controls Plan, and the reasons for not including such recommendations; and

       (iii) a copy of any report(s) prepared by the outside consultant(s).

   (e) A copy of the Routine Controls Report and the Routine Controls Plan 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 Routine Controls Report and the Routine
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   Controls Plan 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 Routine Controls Plan within the specified time frames. In the event such 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.

   [.17]17. (a) Within 30 days of the effective date of this ORDER, the Bank shall appoint a qualified individual to serve as the Bank's security officer. Within 30 days of appointment, the security officer shall review and determine the various types of security features available on the Bank's data processing platforms. After consultation with management, the security officer shall:

       (i) Implement the controls needed to restrict user access to only the level necessary to perform their assigned duties, while providing for an appropriate level of duty separation, and provide for the review of user access levels no less often that quarterly;

       (ii) Provide for the daily production and independent review of system audit, and exception logs and reports;

       (iii) Develop procedures to ensure adequate password security administration controls have been implemented; and

       (iv) Develop an organization-wide security policy that sets guidelines and procedures to ensure an adequately secured processing environment.

   (b) Within 90 days of the effective date of the ORDER, the Bank shall arrange for a backup processing test to be conducted at the backup processing locations. The test shall include:

       (i) Testing of all critical business units and functions;

       (ii) The use of a realistic volume of activity based on the size and complexity of the bank;

       (iii) The use of the actual backup system and data files from the off-site storage location; and

       (iv) Participation and review by bank personnel.

   (c) Within 90 days of the effective date of the ORDER, the Bank shall adopt and implement written operating procedures and policies for the various activities relating to the information technology systems. At a minimum, these procedures and policies shall:

       (i) Ensure implementation of adequate controls and daily operating procedures;

       (ii) Address the level of risk being experienced by the Bank with respect to its processing platforms; and

       (iii) Detail risk management practices relating to the Bank's network, overall security and contingency planning.

   [.18]18. While 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.

   [.19]19. 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's communication, and also (ii) in conjunction with its notice or proxy statement preceding the Bank's next shareholder's 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, Division of Supervision, Registration, Disclosure, & 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.

   [.20]20. On the twentieth day of the first calendar quarter following the effective date of this ORDER, and on the twentieth day of every calendar quarter 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.

   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.

   This ORDER shall become effective l0 days from the date of its issuance.
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   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: July 16, 2003.



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