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FDIC Enforcement Decisions and Orders

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   [12,093] In the Matter of Oakland State Bank, Oakland, Iowa, Docket No. 03-144b (9-16-03)

   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.

   [.1] Management—Qualifications Specified

   [.2] Capital—Maintain Tier 1 Capital

   [.3] Dividends—Dividends Restricted

   [.4] Loan Loss Reserve—Establish of or Increase in 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] Loans—Collections—Written Policy Required

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

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

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

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

   [.13] Violations of Law—Corrections of Violations Required

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

   [.15] Progress Report—Written Report Required

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

FDIC-03-144b

   Oakland State Bank, Oakland, Iowa ("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 regulations 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 September 12, 2003, 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 regulations, the Bank consented to the issuance
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   of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.

   The FDIC considered the matter and determined that it had reasons 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, and/or failing to make provision for an adequate allowance for possible loan and lease losses.

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

         1. the failure to obtain proper loan documentation;

         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; and

         6. 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. Operating with an inadequate loan policy.

       H. Operating with inadequate policies to monitor and control asset growth.

       I. Violating laws and/or regulations, including:

         1. the record-keeping requirements of section 215.8 of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.8;

         2. the collateral requirements of section 23A of the Federal Reserve Act 12 U.S.C. §371c(c)(1)(A)(B)(C) or (D); and

         3. the requirements/prohibitions of section 323.3(a) of the FDIC Rules and Regulations, 12 C.F.R. §323.3(a).

       J. Failing to adequately comply with the guidelines establishing the standards for safety and soundness, set forth in Appendix A to Part 364 of the FDIC Rules and Regulations, 12 C.F.R. Part 364, Appendix A.

   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 the 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 Superintendent of Banking, 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


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       and Regulations, 12 C.F.R. §§ 303.100-303.104.

       (c) During the life of this ORDER, the Bank shall retain qualified management.

       (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 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 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 Superintendent of Banking for review and comment. Within 30 days of the receipt of any comments from the Regional Director 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 for review and comment prior to approval by the Bank.

       (g) Thereafter, the Bank, its directors, officers and employees shall implement and follow the approved Management Plan.

   [.2] CAPITAL MAINTENANCE. 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 in excess of 7 percent.

       (b) During the period this ORDER is in effect, if the capital ratio declines below 7 percent, the Bank shall, within 60 days after the date on which the said ratio so declined, submit a written plan to the Regional Director and the Superintendent of Banking for approval describing the means and timing by which the Bank shall increase such ratio up to or in excess of 7 percent. Upon receiving written notification of the approval of the plan, the Bank shall increase its capital ratio to equal or exceed 7 percent in accordance with the approved plan and shall thereafter maintain its capital ratio at or in excess of such level while this ORDER is in effect.

       (c) 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 Superintendent of Banking.

   [.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 ("ALLL") and any analysis of the Bank's allowance for loan and lease losses provided by the FDIC.

       (a) Within 10 days from the effective date of this ORDER, the Bank shall replenish its ALLL in the amount of at least $575,000.


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       (b) Within 30 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to March 31, 2003, shall be amended and re-filed if they do not reflect a provision for loan and lease losses which is adequate in view of the condition of the Bank's loan portfolio, and which, at a minimum, incorporate the adjustments required by this paragraph.

       (c) 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 ALLL, and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the findings of the review, the amount of increase in the ALLL recommended, if any, and the basis for determination of the amount of ALLL provided.

       (d) While this ORDER is in effect, the Bank shall submit to the Regional Director and Superintendent of Banking the analysis supporting the determination of the adequacy of its ALLL. These submissions may be made at such times as the Bank files the progress reports otherwise required by this ORDER.

       (e) 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 March 31, 2003, that have not been previously collected or charged off.

   [.6]6. REDUCTION OF SUBSTANDARD ASSETS. For purposes of this ORDER and as used in this paragraph, "reduce" means to collect, charge off, or improve the quality of "Substandard" 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 of 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 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan to reduce the Bank's risk position in each asset in excess of $100,000 which is classified "Substandard" in the FDIC's Report of Examination as of March 31, 2003. Thereafter, the Bank shall implement and follow this plan. A copy of the plan shall be submitted to the Regional Director and the Superintendent of Banking upon its completion.

       (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 monthly 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] 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, and remains uncollected, unless its board of directors 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.
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   [.8]8. REDUCTION OF DELINQUENCIES. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan for the reduction and collection of delinquent loans.

       (a) The plan shall include, but not be limited to, provisions which:

         (i) prohibit the extension of credit for the payment of interest;

         (ii) delineate areas of responsibility;

         (iii) establish acceptable guidelines for the collection of delinquent credits; and

         (iv) provide 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 Superintendent of Banking upon its completion. Thereafter, the Bank shall implement and follow the plan.

   [.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) In making the initial review of the Bank's loan policy required by this paragraph, the Bank, at a minimum, shall add provisions, or ensure it provides for:

       (i) establishing officer lending limits and limitations on the aggregate level of credit to any one borrower which can be granted without the prior approval of the Bank's loan committee;

       (ii) 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;

       (iii) requiring that all extensions of credit originated or renewed by the Bank:

         (A) be supported by current credit information and collateral documentation, including lien searches and the perfection of security interests;

         (B) have current financial information, profit and loss statements or copies of tax returns, and cash flow projections, which information shall be maintained throughout the term of the loan; and

         (C) have a clearly defined and stated purpose and a predetermined and realistic repayment source and schedule;

       (iv) incorporating limitations on the amount that can be loaned in relation to established collateral values, including the requirement that the source of the valuations be identified and that such collateral valuations be completed prior to the disbursement of loan proceeds and be performed on a periodic basis over the term of the loan;

       (v) establishing limitations on the maximum volume of loans in relation to total assets;

       (vi) requiring the establishment and maintenance of a loan grading system and internal loan watch list;

       (vii) requiring that extensions of credit to any of the Bank's executive officers, directors, or principal shareholders, or to any related interest of such person, be thoroughly reviewed for compliance with all provisions of Regulation O and Part 337 of the FDIC's Rules and Regulations, 13 C.F.R. Part 337;

       (viii) requiring accurate reporting of past due loans to the loan committee on at least a monthly basis;

       (ix) establishing standards for collection efforts for past due loans;

       (x) establishing guidelines for timely recognition of loss through charge-off;

       (xi) requiring loan committee review and monitoring of the status of repayment and collection of overdue and maturing loans, as well as all loans classified "Substandard" and "Doubtful" in Regulatory Reports of Examination;

       (xii) requiring a written plan to lessen the risk position in each line of credit identified as a problem credit on the Bank's internal loan watch list;

       (xiii) prohibiting the extension of a maturity date, advancement of additional credit or renewal of a loan to a borrower whose obligations to the Bank were classified "Substandard" or "Doubtful", whether in whole or in part, in Regulatory Reports of Examination, without the full collection in cash of accrued and unpaid interest, unless the loans are well secured


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       and/or are adequately supported by current and complete financial information, and the renewal or extension has first been approved in writing by a majority of the Bank's board of directors;

       (xiv) prohibiting the capitalization of interest or loan-related expenses unless the board of directors provides, in writing, a detailed explanation of why said deviation is in the best interest of the Bank;

       (xv) addressing concentrations of credit and diversification of risk, including goals for portfolio mix, establishment of limits within loan and other asset categories, and development of a tracking and monitoring system for the economic and financial condition of specific geographic locations, industries, and groups of borrowers;

       (xvi) requiring that collateral appraisals be completed prior to the making of secured extensions of credit, and that no less than annual collateral valuations be performed for all secured loans; and

       (xvii) establishing review and monitoring procedures for compliance with the FDIC's regulation on appraisals, 12 C.F.R. Part 323.

   (b) The Bank shall inform the Regional Director and the Superintendent of Banking, in writing, how it intends to ensure compliance. Thereafter, the Bank shall implement and follow the written loan policy.

   [.10]10. TECHNICAL EXCEPTIONS. Within 60 days from the effective date of this ORDER, the Bank shall correct the technical exceptions listed in the FDIC Report of Examination as of March 31, 2003. "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. FUNDS MANAGEMENT PLAN. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan addressing liquidity, contingent funding, and asset liability management. A copy of the revised plan shall be submitted to the Regional Director and the Superintendent of Banking upon its completion. 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.

   [.12]12. 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 Superintendent of Banking upon their completion. 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.

       (c) A written profit plan and budget shall be prepared for each calendar year for which this ORDER is in effect.

   [.13]13. VIOLATIONS OF LAW AND REGULATION. Within 60 days from the effective date of this ORDER, the Bank shall: (a) correct the violations of law and regulations and the deficiencies in compliance with the guidelines establishing the standards for safety and soundness set forth in Appendix A to Part 364 of the FDIC Rules and Regulations, 12 C.F.R. Part 364, Appendix A, as set forth in the FDIC's Report of Examination as of March 31, 2003; and (b) implement procedures to ensure future compliance with all applicable laws, regulations and guidelines.

   [.14]14. DISCLOSURE TO SHAREHOLDERS. Following the effective date of this ORDER, the Bank shall send to its shareholders,
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   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 dissemination to shareholders. Any requests for changes made by the FDIC shall be made prior to dissemination of the description, communication, notice or statement.

   [.15]15. PROGRESS REPORTS. Within 60 days of the effective date of this ORDER, the Bank shall furnish a written progress report to the Regional Director and the Superintendent of Banking detailing the form and manner of all actions taken to secure compliance with this ORDER, and the results thereof. In addition, the Bank shall furnish such subsequent or additional reports on request of either the Regional Director or the Superintendent of Banking. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank, signed by each of them, and made a part of the minutes of the board meeting.

   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

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Last Updated 12/7/2003 legal@fdic.gov