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   [5273] In the Matter of First State Bank, Crossett, Arkansas, Docket No. 02-069b (8-4-03).

   [.1] Cease and Desist Orders—Unsafe or Unsound Banking Practices

   [.2] Cease and Desist Orders—Management Weaknesses

   [.3] Directors—Responsibilities

   [.4] Capital Requirements—Maintain Tier I

   [.5] Loans—Loan Loss Reserve

   [.6] Loans—Charge-off or Collection

   [.7] Loans—Limit to Borrowers with Existing Adversely Classified Credit

   [.8] Loans—Review Program

   [.9] Loans—Internal Review and Grading System

   [.10] Directors—Managing Other Real Estate, Plan Needed

   [.11] Loans—Bank Compliance Officer to Review

   [.12] Reports of Condition and Income—Report Required

   [.13] Dividends—Payments Restricted

   [.14] Shareholders—Notice of Violation Required

   [.15] Reports—Written Progress Reports Required

In the Matter of
FIRST STATE BANK
CROSSETT, ARKANSAS
(Insured State Nonmember Bank)
DECISION AND ORDER TO CEASE AND DESIST

FDIC-02-069b

I. INTRODUCTION

   This matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") following Administrative Law Judge Ann Z. Cook's ("ALJ") issuance on April 25, 2003, of a Recommended Decision and Order to Cease and Desist ("Recommended Decision") against First State Bank, Crossett, Arkansas ("Bank"). The FDIC sought the cease and desist order pursuant to section 8(b) of the Federal Deposit Insurance Act ("FDI Act") to halt unsafe and unsound banking practices and to compel the Bank to implement an affirmative action plan to correct the cited problems and deficiencies.

   The Board has reviewed the record, the parties' submissions, the Recommended Decision and the Bank's exceptions to the Recommended Decision. The Board agrees with the ALJ's findings and conclusions that the Bank engaged in unsafe and unsound banking practices and adopts in full her Recommended Decision.

II. STATEMENT OF THE CASE

   The Bank, a corporation existing and doing business under the laws of the State of Arkansas, was during the pertinent time period a federally insured nonmember bank with assets totaling approximately $35 million. On January 22, 2002, the FDIC commenced a safety and soundness examination of the Bank's books and records as of September 30, 2001 ("2002 examination"). The resulting FDIC Report of Examination ("Exam Report") revealed many operational and managerial deficiencies stemming largely from the Bank's hazardous lending and lax collection practices. Prior to the hearing, the Bank stipulated to the adverse loan classifications and loan data and documentation deficiencies cited in the Exam Report.

   As a result of the problems discovered during the 2002 examination, a Notice of Charges and of Hearing ("Notice") was issued on June 18, 2002, alleging that the Bank had engaged in unsafe and unsound banking practices and seeking a cease and desist order to stop such practices and to implement corrective action. Specifically, the Notice charged that the Bank was operating with hazardous lending and lax collection practices,
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   an excessive quantity of poor-quality loans, excessive loan losses, insufficient capital, inadequate loan valuation reserves, negative earnings, inadequate management oversight, management whose policies and practices were detrimental to the Bank and jeopardized the safety of its deposits, and inadequate supervision by its board of directors.

   The Bank replied to the Notice on July 11, 2002, contesting the allegations that it had engaged in unsafe and unsound banking practices. The Bank also requested a private hearing in this matter but the FDIC Executive Secretary, on September 9, 2002, denied that request because the Bank had failed to demonstrate that a public hearing would be contrary to the public interest as required by section 8(u)(2) of the FDI Act, 12 U.S.C. §1818(u)(2).

   Following document discovery by both parties, a three-day oral hearing was held from November 4 through 6, 2002, in Little Rock, Arkansas. FDIC Enforcement Counsel ("Enforcement Counsel") presented evidence through two witnesses. The Bank, through its counsel, presented four witnesses in support of its opposition to the proposed cease and desist order.

   Following the parties' submission of post-hearing briefs and proposed findings of fact and conclusions of law and reply briefs, the ALJ issued her Recommended Decision. On May 23, 2003, the Bank filed exceptions to the Recommended Decision. The Executive Secretary closed the record in this matter on June 12, 2003.

III. DISCUSSION

   After a thorough review of the record in the proceeding, the Board finds that the ALJ's findings of fact and conclusions of law were correct as to the unsafe and unsound practices and resulting serious financial condition of the Bank as of the 2002 examination. As discussed below, the Board is not persuaded by any of the three exceptions raised by the Bank.

   First, the Bank asserts, but fails to demonstrate, that the AU in her Recommended Decision improperly relied on stricken material. Except. at 4–6.11 The Bank correctly points out that the ALJ, in response to the Bank's Motion to Strike, issued a post-hearing order stating that she would not consider supplemental proposed findings of fact and conclusions of law submitted by Enforcement Counsel in its reply to the Bank's post-hearing submission because replies to post-hearing submissions "must be strictly limited to responding" to the opposing party's initial submission. See 12 C.F.R. §308.37(b). The Bank asserts that the AU improperly relied on Enforcement Counsel's supplemental findings and conclusions in reaching her decision, but it fails to provide any concrete example. The Bank's argument is apparently based on its view that, without consideration of the stricken supplemental findings, the AU could not have found sufficient evidence to recommend the Cease and Desist Order ("C&D Order").

   The Board has reviewed the record of this proceeding, including the ALJ's Recommended Decision, in light of this exception, and finds no evidence in support of this charge. To the contrary, the Board observes that the AU has issued a carefully reasoned and well documented Recommended Decision with 22 detailed findings of fact, all of which are sustained by citations to the record, and four conclusions of law supported by legal authority. R.D. at 11–16.

   The Board further notes that many of the ALJ's findings and conclusions were adopted, in some instances verbatim, from Enforcement Counsel's initial proposed findings of fact and conclusions of law, which having been submitted in full compliance with the ALJ's post-hearing order and Rule 308.37 of the FDIC's Rules of Practice and Procedure, 12 C.F.R. §308.37, are legitimately a part of the record in this proceeding. Conversely, the ALJ's findings and conclusions contain none of the wording proposed by Enforcement Counsel in its stricken pleading. In any event, the ALJ, in reaching her decision, was free to consider all of the testimonial and documentary evidence admitted during the hearing even though some of that evidence might have been offered in support of the stricken pleading. As there is no evidence suggesting that the AU was improperly swayed by the stricken pleading,


1 Citations to the record shall be as follows:
Recommended Decision — "R.D. at ____"
Transcript "Tr. Vol. ____ at ____
FDIC Exhibits — "FDIC Exh. ____"
Respondent's Exceptions — "Except. at _____"
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   the Board rejects this exception as entirely unsupported by the record.

   Second, the Bank challenges paragraph 13, the stockholder notification provision, of the C&D Order. Except. at 6–7. With respect to this issue, the Bank, rearguing a matter that was adequately addressed by the AU in the Recommended Decision, contends that notice to the Bank's stockholders of the fact of the C&D Order might cause additional financial problems for the Bank. See R.D. at 8–9.

   As noted by the ALJ, stockholder notification is an appropriate remedy under section 8(b). 12 U.S.C. §1818(b)(6)(F). R.D. at 9. In this case, many of the Bank's problems were attributed to inadequate oversight by management and supervision by the Bank's board. As the FDIC examiner-in-charge stated at the hearing, the contents of the C&D Order provide Bank stockholders (who are responsible for electing bank directors) with critical information necessary for them to make informed decisions to prevent similar problems in the future. Tr. Vol. 1 at 153–155.

   Interestingly, even though the Bank objects to the inclusion of the shareholder notification provision, each of its witnesses testified on cross examination that they would want to know about the issuance of a cease and desist order if they were shareholders (indeed, some of those witnesses are shareholders of the Bank). Tr. Vol. 2 at 406–407, Tr. Vol 3 at 615, 655 and 719. In this case, shareholder notification is especially important because paragraph 12 of the C&D Order restricts dividend payments. R.D. at 9. Having considered the Bank's witnesses claims of possible but unsubstantiated negative effects of stockholder notification, the Board has determined that on balance notification to the Bank's stockholders (even minority stockholders) is in the best interests of the Bank and its depositors and, accordingly, rejects this exception.

   Finally, the Bank asserts that paragraph 4(c) of the C&D Order, which requires that "the Bank shall achieve, within thirty days of the effective date of this ORDER, a valuation reserve for loan and lease losses, . . . of not less than $950,000, and shall thereafter maintain, through charges to current operating income, an adequate valuation reserve for loan and lease losses", should be modified for clarity. Except. at 7–8. The Bank argues that because the Bank added the required $950,000 to its loan loss reserve shortly after the FDIC asked it to do so following the 2002 examination, paragraph 4(c) could be construed to require it to allocate an additional $950,000 to the reserve after the C&D Order is issued. But as the ALJ noted in her Recommended Decision, paragraph 4(e) of the C&D Order plainly states that "[t]he requirements of [4(c)] are not to be construed as a standard for future operations", making clear that once the Bank achieved the $950,000 level it was required thereafter only to maintain an "adequate" reserve. R. D. at 10 n. 10. The Board finds that it was reasonable to include paragraph 4(c) in the C&D Order and further finds that the C&D Order could not be fairly read to require the Bank to add a second allocation of $950,000. Thus, the Bank's exception concerning this provision is unpersuasive.

IV. CONCLUSION

   The Board concludes that the record fully supports the issuance of a formal cease and desist order and corrective plan and hereby adopts and incorporates the ALJ's Recommended Decision and Order, as set forth below.

ORDER TO CEASE AND DESIST

   [.1] IT IS HEREBY ORDERED that the Bank, its directors, officers, employees, agents, and other institution-affiliated parties (as that term is defined in Section 3(u) of the Act, 12 U.S.C. §1813(u)), and its successors and assigns cease and desist from the following unsafe or unsound banking practices:

       (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 in such a manner as to produce operating losses;

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

       (f) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank.


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

   [.2] 1. (a) During the life of this ORDER, the Bank shall have management qualified to restore the Bank to a sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible for supervising the Bank's overall lending function.

   (b) 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, and earnings adequacy;

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

       (iv) 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.

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

       (ii) The Bank shall comply with section 32 of the Act, 12 U.S.C. §1831i.

   (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 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 ten (10%) 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.

   [.3] 2. (a) Within 60 days from the date of this ORDER, the board of directors shall review and make a written report ("Management Report") on the Bank's management needs in the lending area. The Management Report shall incorporate an analysis of the Bank's management and staffing requirements and shall, at a minimum:

       (i) Identify both the number and type of positions needed to properly supervise the Bank's lending functions, giving appropriate consideration to the Bank's loan volume, customer base and the number of problem credits;

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

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

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

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

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

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

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

   (c) Within 90 days of the effective date of this ORDER, the board of directors, with the assistance of the outside consultant(s), shall prepare a written plan of implementation ("Plan") addressing the findings of the Management Report. The Plan shall specify the actions to be taken by the board of directors and the time frames for each action.

   (d) Within 90 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) that 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 for review and comment. Within 30 days from receipt of any comment, and after consideration of such comment, the board of directors shall approve the Management Report and Plan, 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, in writing, of specific reasons for deviating from the Plan.

   [.4] 3. (a) Within 60 days from the effective date of this ORDER, the Bank shall have Tier I capital equal to or greater than eight (8%) percent 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 eight (8%) percent of the Bank's adjusted Part 325 total assets.

   (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;

       (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 (or, its successor 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 convertibility factor, shall be presented to the Regional Director for prior approval.
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   (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'ssecurities 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, 12 C.F.R. §325.2. The "Capital Calculations" schedule on pages 38–39 of the Report of Examination provides the method for determining the ratio of Tier I capital to adjusted Part 325 total assets as required by this ORDER.

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

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

       (i) 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;

       (viii) The overall risk associated with each concentration of credit together with the degree of risk associated with each related individual borrower; and

       (ix) 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, the Bank shall achieve, within 30 days of the effective date of this ORDER, a valuation reserve for loan and lease losses, after charge-off of loans classified "Loss" as required in Paragraph 5(a) below, of not less than $950,000, 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 determines, at subsequent examinations and/or visitations, that the Bank's valuation reserve for loan and lease losses is inadequate, the Bank shall amend its Consolidated Reports of Condition and Income in accordance with Paragraph 4(a).

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

   [.6] 5. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as
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   of December 31, 2001, 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 purposes of this paragraph.

   (b) Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director 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" as of September 30, 2001, and which aggregated $100,000 or more. Such plan shall include but not be limited to, the following:

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

       (ii) Provisions for the submission of monthly written progress reports under this Paragraph 5 to the Bank's board of directors for review and recordation in the board minutes.

   (c) As used in Paragraph 5(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.

   [.7] 6. (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" and was uncollected as of September 30, 2001. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.

   (b) Paragraph 6(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 extending 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, or a designated committee thereof, 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 $100,000 and are adversely classified "Substandard" as of September 30, 2001, 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.

   (d) The minutes shall also include the following information about the extension of credit:

       (i) The amount adversely classified as of September 30, 2001;

       (ii) The current balance;

       (iii) The amount of credit requested;

       (iv) A description of the collateral and its value securing the credit; and

       (v) 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.

   (e) Beginning with the effective date of
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   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 the separate notes receive prior board approval in the same manner as outlined in Paragraph 6(c).

   (f) As used in this paragraph, the term "further extension of credit" shall include renewals, extensions, and a further advancement of funds.

   [.8] 7. (a) Within 60 days from the effective date of this ORDER, the Bank shall review and modify its written loan policy and make whatever changes may be necessary to address the weaknesses cited in the FDIC Report of Examination as of September 30, 2001, and provide for the safe and sound administration of all aspects of the lending function. The Bank shall adopt and enforce procedures designed to assure that the Bank's loan policy is adhered to by the Bank's loan officers. The Bank's loan policy shall require that every extension of credit which deviates from its loan policy shall receive the prior approval of the Bank's board of directors, and the deviation and the reason for it, shall be documented in the minutes of the board meeting and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   (b) Beginning with the effective date of this ORDER, the Bank shall initiate and implement a program to strengthen its credit files and correct the technical exceptions as detailed on pages 34–37 of the Report of Examination. In all future operations, the Bank shall ascertain that all documents or evidence thereof, properly completed, are obtained before credit is extended.

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

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

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

       (iii) An identification or grouping of loans that warrant the special attention of management;

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

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

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

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

       (viii) An identification of insider loan transactions; and

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

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

   (c) Within 60 days from the effective date of this ORDER, the Bank's board of directors shall establish and appoint a loan committee to review and approve in advance all extensions of credit, and/or renewals that when aggregated with all other extensions of credit to that borrower, either directly or indirectly, exceed or would exceed $100,000. The review should include financial, income, and cash flow information, collateral values and lien information, repayment terms, past performance by the borrower, the purpose of the extension, and whether the extension complies with the Bank's loan policy and applicable laws, rules and regulations. The loan committee shall meet at least twice monthly and shall maintain written minutes that 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
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   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.

   [.10] 9. (a) Within 90 days from the effective date of this ORDER, the board of directors shall develop a plan for managing the Other Real Estate ("ORE") of the Bank. The written ORE plan shall include, at a minimum:

       (i) A quarterly review of the ORE portfolio by the ORE committee to be appointed by the Bank;

       (ii) Realistic and comprehensive budgets for each piece of ORE, including projections of the Bank's cost of marketing the ORE, and the Bank's costs of carrying the ORE on its books (e.g., upkeep, repairs, and insurance costs);

       (iii) A determination by the ORE committee for each piece of ORE that the property is listed with a real estate broker or otherwise made widely available for sale in an appropriate manner, and that the proposed selling price is realistic;

       (iv) Guidelines to ensure that periodic appraisals are obtained for the ORE and that progress reports are obtained from all real estate brokers marketing the ORE, including a projected sales time frame for each piece of ORE;

       (v) Guidelines to ensure that all taxes and insurance premiums are timely paid;

       (vi) An identification of any ORE that warrants the special attention of management;

       (vii) An identification of documentation exceptions on any ORE; and

       (viii) An identification of all ORE not in conformance with the Bank's policies, or exceptions to the Bank's ORE policy.

   (b) Reports from the ORE committee shall be submitted to the board of directors on at least a quarterly basis and a copy of such reports, as well as documentation of the action taken by the Bank to facilitate the timely sale of ORE, shall be made part of the minutes of the board of directors.

   [.11] 10. (a) Within 30 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 form of indirect indebtedness, in an amount in excess of $25,000 or less than $100,000, shall be reviewed by the Bank's Compliance Officer. The Bank's Compliance Officer shall 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. A copy of the Compliance Officer's review shall be made a part of the Bank's loan file. The 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 director's approval. The report shall be made a part of the minutes of the board meeting.

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

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

   (b) In addition to the above and during the life of this ORDER, the Bank shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the 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.

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

   [.14] 13. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER:

   (a) In conjunction with the Bank's next shareholder communication.

   (b) In conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Division of Supervision and Consumer Protection, Registration, Disclosure, & Securities Unit (or its successor 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.

   [.15] 14. On the fifteenth day of the second month following the effective date of this ORDER, and on the fifteenth day of every third month thereafter, the Bank shall furnish written progress reports to the Regional Director 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 has 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 10 days from the date of its issuance.

   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.

   IT IS FURTHER ORDERED that copies of this Decision and Order to Cease and Desist shall be served on the Bank, counsel for all parties, the ALJ, and the Bank Commissioner for the State of Arkansas.

   By Direction of the Board of Directors.

   Dated at Washington, D.C., this 4th day of August, 2003.

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