Federal Deposit
Insurance Corporation

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   [¶10,073] In the Matter of Bank of Horton, Horton, Kansas, Docket No. FDIC-90-86b (5-18-90)

   Bank to cease and desist from practices such as operating with inadequate capital and allowance for loan and lease losses; paying excessive cash dividends in relation to Bank's net income and capital position; engaging in hazardous lending policies; providing inadequate supervision, direction and planning over the affairs of the Bank; engaging in practices which produce inadequate operating income; excessively using brokered deposits to fund asset growth without adequate capital to support such growth; operating with management whose policies and practices are detrimental to Bank; engaging in violations of applicable laws; operating with inadequate experience, qualifications, knowledge and training for Bank's student loan business; and excessively using brokered deposits to fund asset growth. (This order was terminated by order of the FDIC dated 7-8-91; see ¶ 15,300.)

   [.1] Definitions—"Student Loans"
   [.2] Management—Qualifications—Compliance
   [.3] Equity Capital—Increase—Methods
   [.4] Equity Capital—Written Plan—Minimum Requirements
   [.5] Loan Loss Reserve—Maintain—Review
   [.6] Assets—Adversely Classified—Reduce
   [.7] Student Loans—Reduce/Curtail—Compliance
   [.8] Student Loans—Policy—Minimum Requirements
   [.9] Brokered Deposits—Reduce/Curtail
   [.10] Mortgage Servicing Rights—Appraisal—Market Valuation
   [.11] Shareholders—Dividends—Approval
   [.12] Violations of Law—Eliminate/Correct—Compliance
   [.13] Bank Operations—Internal Routine and Controls—Correct Deficiencies
   [.14] Shareholders—Disclosure—Cease and Desist Order
   [.15] Compliance—Progress Reports—Frequency

{{9-30-91 p.C-366.2}}
In the Matter of
BANK OF HORTON
HORTON, TEXAS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Bank of Horton, Horton, Kansas ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Bank and of its right to a hearing on such alleged charges under section 8(b) of the Federal Deposit Insurance 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") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated May 9, 1990, whereby solely for the purpose of this proceeding and without admitting or denying any unsafe or unsound banking practices or 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 violated laws 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 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/or regulations:

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   A. operating with inadequate capital and allowance for loan and lease losses for the kind and quality of assets held;
   B. engaging in violations of applicable laws and regulations;
   C. operating with management whose policies and practices are detrimental to the Bank;
   D. engaging in practices which produce inadequate operating income;
   E. paying excessive cash dividends in relation to the Bank's net income and/or capital position;
   F. operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   G. engaging in hazardous lending practices, including making student loans without adequate controls;
   H. failing to provide adequate supervision, direction and planning over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and/or regulations;
   I. operating the Bank with management that has inadequate experience, qualifications, knowledge and training for the safe and sound operation of the Bank's student loan business;
   J. excessively using brokered deposits to fund asset growth without adequate correlation between the maturity distribution of the brokered deposits and the assets, resulting in undue strain on the Bank's liquidity; and
   K. engaging in asset growth without maintaining adequate capital to support such growth.
   IT IS FURTHER ORDERED, that the Bank, its Institution-Affiliated Parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. For the purposes of this ORDER, the following terms have the meanings indicated:
   (a) "Brokered Deposit(s)" has the same meaning as defined in section 337.6(a)(1) of FDIC's Rules and Regulations, 54 Fed. Reg. 51014 (Dec. 12, 1989), to be codified at 12 C.F.R. §337.6(a)(1), as the same may be from time to time amended, replaced, or extended.
   (b) "Extension of Credit" has the same meaning as defined in section 215.3 of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.3, except that it also includes a commitment to make an Extension of Credit.
   (c) "Guarantee Agency" means a State or private nonprofit organization that has an agreement with the Secretary of the U.S. Department of Education to administer a loan guarantee program under the Higher Education Act of 1965, as amended, 20 U.S.C. §1070 et seq. ("Higher Education Act of 1965");
   (d) "Institution" means:

   (i) a public or private institution of higher education,
   (ii) a proprietary institution of higher education,
   (iii) a postsecondary vocational institution, or
   (iv) a vocational school.

{{4-1-90 p.C-367}}IV of the Higher Education Act of 1965, and the following programs under Title IV:

   (i) the Guaranteed Student Loan (Stafford Loan) Program, 20 U.S.C. §1071 et seq.;
   (ii) the Supplemental Loans for Students (SLS) Program, 20 U.S.C. §1078-1;
   (iii) the Parent Loans to Undergraduate Students (PLUS) Program, 20 U.S.C. §1078-2;
   (iv) the Consolidation Loan Program, 20 U.S.C. §1078-3;
   (v) the Income Contingent Loan Program, 20 U.S.C. §1087aa et seq.; and
   (vi) the Perkins Loan Program, 20 U.S.C. §1087a et seq.

   [.2] 2. (a) (i) No more than 90 days from the effective date of this ORDER, the Bank shall have and thereafter retain qualified management. Such management shall include a qualified senior executive officer who shall be given stated written authority by the Bank's board of directors to supervise the Bank's Student Loan business, including responsibility for implementing and maintaining lending and operating policies and practices in accord with sound banking practices. The senior executive officer shall have appropriate qualifications and experience to manage and supervise all aspects of the Bank's Student Loan business. 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 of the Act, 12 U.S.C. §1831i, and section 303.14 of the FDIC Rules and Regulations, 54 Fed. Reg. 53040 and 53043 (to be codified at 12 C.F.R. §303.14).
   (ii) The assessment of whether the Bank has "qualified management" shall be based upon management's conduct, both individual and joint, with respect to the Bank in: (A) complying with the requirements of this ORDER; (B) complying with applicable laws and regulations; and (C) not engaging in any unsafe or unsound banking practice which has an adverse effect on the Bank's asset quality, capital adequacy, earnings, or liquidity.
   (b) The board of directors shall in no more than 30 days from the effective date of this ORDER develop a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:

   (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank, including the Bank's Student Loan business;
   (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
   (iii) evaluation of each Bank officer, and in particular the senior executive officer responsible for the Bank's Student Loan business, and staff member 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 maintenance of the Bank in a safe and sound condition; and
   (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the board of directors determines are necessary to fill Bank officer or staff member positions consistent with the board's analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.

   [.3] 3. (a) (i) No later than July 31, 1991, the Bank shall have total equity capital, exclusive of the allowance for loan and lease losses required to be maintained in accordance with paragraph 4 of this ORDER, at or in excess of 6 percent of the Bank's total assets ("equity capital ratio") and shall thereafter maintain its equity capital ratio at or in excess of such level as calculated herein while this ORDER is in effect. The terms "total equity capital" and "total assets" shall have the same meaning as those terms have in the prevailing Instructions for Preparation of Reports of Condition ("Instructions"), except "total assets" shall also include Student Loan Commitments.
   (ii) Commencing July 31, 1991, the equity capital ratio shall be calculated as of each Report Condition, the Bank shall separately report to the Regional Director the actual Student Loan Commitments for each month-end used to calculate total assets in paragraph 3(a)(ii)(B) above.
   (b)(i) In order to acheive the equity capital ratio required by paragraph 3(a)(i), the Bank shall have an equity capital ratio, as of the dates listed in this paragraph 3(b)(i), at or in excess of the prescribed percentage:

   (ii) For the purpose of calculating the monthly equity capital ratios required by paragraph 3(b)(i), "equity capital ratio" shall mean the Bank's equity capital, exclusive of the allowance for loan and lease losses, divided by the Bank's total assets. In computing such equity capital ratio, the Bank's total assets shall be the average of the sum of the Bank's daily total assets for the month of calculation, plus Student Loan Commitments computed as of the last business day of the month of calculation.
   (iii) In order to determine compliance with the monthly equity capital ratios required by paragraph 3(b)(i) of this ORDER, such equity capital ratios shall be computed as of the last business day of each calendar month.

   [.4] (c) (i) Within 45 days after the effective date of this ORDER, the Bank shall develop a written plan to restore its equity capital ratio to 6 percent, which capital plan shall include, at a minimum:

   (A) methods and strategies for restoring the Bank's equity capital ratio to 6 percent by July 31, 1991;
   (B) methods and strategies for achieving specific target equity capital ratios for each calendar month during the term of the plan, which target equity capital ratios shall be at least equal to the equity capital ratios required by paragraph 3(b)(i); and
   (C) methods and strategies for reducing the total dollar amount of Student Loans held on the Bank's books more than 120 days as required by paragraph 6(a).

   (f) (i) If the Bank fails to achieve any of the monthly equity capital ratios required by paragraph 3(b)(i), the Bank shall immediately cease making, approving, or purchasing Student Loans and shall not, except with the prior written consent of the Regional Director, thereafter make, approve, or purchase, directly or indirectly, any Student Loan until such time as the Bank is in compliance with paragraph 3(b)(i) and provides evidence of such compliance satisfactory to the Regional Director.
   (ii) If, at any time after July 31, 1991, the equity capital ratio required by paragraph 3(a) declines below 6 percent, the Bank shall immediately cease making, approving, or purchasing Student Loans, and shall not, except with the prior written consent of the Regional Director, thereafter make, approve, or purchase, directly or indirectly, any Student Loan until such time as the Bank's equity capital ratio is at least 6 percent and the Bank provides evidence of such fact satisfactory to the Regional Director.
   (iii) Nothing in paragraphs 3(f)(i) or 3(f)(ii) shall prohibit the Bank from advancing funds in connection with any Student Loan for which the Bank had a binding commitment to do so prior to the date that any prohibition contained in paragraphs 3(f)(i) or 3(f)(ii) took effect; provided such commitment was made by the Bank in good faith and not for the purpose of evading the prohibitions of paragraphs 3(f)(i) or 3(f)(ii).

   [.6] 5. No more than 10 days from the effective date of this ORDER, the Bank: (1) shall eliminate from its books by collection,
{{4-1-90 p.C-370}}charge-off, or other proper entries, all assets or portions of assets classified "Loss" as of November 9, 1989; and (2) shall either (A) eliminate from its books by collection, charge-off, or other proper entries, or (B) if the asset is an extension of credit or lease, increase its allowance for loan and lease losses by an amount equal to 50 percent of those assets or portions of assets classified "Doubtful" as of November 9, 1989, which have not been previously collected, charged off, or otherwise eliminated by other proper entries. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph.

   [.7] 6. (a) No later than July 31, 1991, the Bank shall reduce the aggregate dollar amount of all Student Loans held on the Bank's books more than 120 days to no more than thirty million dollars ($30,000,000) and shall thereafter maintain the aggregate dollar amount of Student Loans held on the Bank's books more than 120 days at or below such level while this ORDER is in effect.
   (b) The Bank shall not make, approve, or purchase Student Loans in an aggregate dollar amount in excess of eight million dollars ($8,000,000) in any calendar month; provided, Student Loans to or for the benefit of students attending Institutions which provide an educational program for the award of a baccalaureate, graduate, or professional degree and which are accredited or preaccredited by a nationally recognized accrediting agency or association shall not be included for purposes of the limitation contained in this paragraph 6(b).
   (c) The Bank shall not make, approve, or purchase Student Loans to or for the benefit of students attending an Institution if the average principal balance of all Student Loans made, approved, or purchased by the Bank during the preceding 12 calendar months to or for the benefit of students attending such Institution is less than two thousand three hundred dollars. The average principal balance shall be the quotient obtained by dividing the aggregate of the dollar amounts of all Student Loans made by the Bank, to or for the benefit of students attending an Institution by the number of Student Loans made by the Bank to or for the benefit of students attending such Institution.
   (d) The Bank shall not make, approve, or purchase any Student Loan to or for the benefit of any student attending an Institution which has an Institutional Default Rate in excess of 20 percent, as reported in the latest data complied and issued by the U.S. Department of Education for the Guaranteed Student Loan Programs or as reported in the latest data compiled and issued by the Guarantee Agency which guarantees such Institution's Student Loans.
   (e) The Bank shall not make, approve, or purchase any Student Loan which is not guaranteed or reinsured by the Federal government.
   (f) The weighted average Institutional Default Rate for all Student Loans made, approved, or purchased by the Bank in any calendar month shall not exceed 10 percent. The weighted average Institutional Default Rate shall be the sum of the products obtained by multiplying the Institutional Default Rate for each Institution by the total dollar amount of Student Loans made by the Bank during the month to students attending that Institution divided by the total dollar amount of Student Loans made by the Bank during the month. The Institutional Default Rate is derived from the same sources set forth in paragraph 6(d) of this ORDER.

   (g) (i) If, during the period this ORDER is in effect, the Bank violates or is not in compliance with the provisions of paragraph 6(a), the Bank shall immediately cease making, approving, or purchasing Student Loans, and shall not, except with the prior written consent of the Regional Director, thereafter make, approve, or purchase, directly or indirectly, any Student Loan until such time as the Bank is in compliance with paragraph 6(a), and provides evidence of such compliance satisfactory to the Regional Director.
   (ii) Nothing in paragraph 6(g)(i) shall prohibit the Bank from advancing funds in connection with any Student Loan for which the Bank had a binding commitment to do so prior to the date that any prohibition contained in paragraph 6(g)(i) took effect; provided such commitment was made by the Bank in good faith and not for the purpose of evading the prohibitions of paragraph 6(g)(i).

   (i) provide for the development of additional secondary markets for the sale of the Bank's Student Loans, including at a minimum, maintaining at all times a primary and one or more auxiliary purchasers of its Student Loans;
   (ii) establish goals and strategies to decrease the Bank's reliance on brokered deposits to fund Student Loans, consistent with the Bank's capital plan and the requirements of this ORDER;
   (iii) restrict the aggregate dollar amount of Student Loans held on the Bank's books to a level that will enable the Bank to achieve and maintain an equity capital ratio of at least 6 percent at all times;
   (iv) require Institutions to meet appropriate requirements before an Institution's students will be eligible for a Student Loan from the Bank, which shall include, at a minimum, a requirement that the Institution meet the default rate requirements of paragraph 6(d);
   (v) require that all Student Loans made, approved, or purchased by the Bank have an average principal balance of at least two thousand three hundred dollars ($2,300.00) per Institution;
   (vi) require that the Bank's Student Loans be placed for servicing, prior to entering repayment status, with a servicer having an appropriate record of compliance with applicable statutory and regulatory due diligence requirements for Student Loans;
   (vii) prohibit the Bank from making, approving, or purchasing any Student Loan which is not guaranteed or reinsured by the Federal government;
   (viii) prohibit the use of commissions or other types of incentive compensation by the Bank, or any of its Institution-Affiliated Parties, employees, or agents, in connection with the making of Student Loans; or in lieu thereof, prohibit any Institution-Affiliated Party of the Bank who is compensated on a commissioned or incentive basis from participating in the approval or acceptance of Student Loans;
   (ix) establish record keeping and information systems sufficient to ensure the Bank's compliance with applicable statutory and regulatory due diligence requirements, and the requirements of the Guarantee Agency or Agencies providing guaranties of the Bank's Student Loans; and
   (x) prohibit the disbursment of funds in connection with any Student Loan, unless (A) prior to such disbursement, the Bank has obtained the guaranty of a Guaranty Agency, (B) such disbursement is made in the manner prescribed by the Guaranty Agency providing the guaranty, and (C) the amounts disbursed do not exceed the amount of the guaranty provided.

   [.9] 8. (a) After the effective date of this ORDER, the volume of Brokered Deposits held by the Bank shall not exceed the volume of such deposits held by the Bank as of November 9, 1989.
   (b) After the effective date of this ORDER, and until such time as the average maturity of Brokered Deposits held by the Bank shall be reduced to or below the average maturity of such deposits held by the Bank as of November 9, 1989, the Bank shall not accept, renew, or roll over any
{{4-1-90 p.C-372}}Brokered Deposit for a term exceeding three months. Thereafter, the average maturity of Brokered Deposits held by the Bank shall not exceed the average maturity of such deposits held by the Bank as of November 9, 1989.
   (c) The Bank shall reduce dollar-for-dollar the aggregate dollar amount of Brokered Deposits held by the Bank as they mature by the amount of any reductions in the aggregate dollar amount of Student Loans held by the Bank as such reductions in Student Loans are from time to time effected.
   (d) The Bank shall take all reasonable actions to eliminate all Brokered Deposits from the Bank by July 31, 1991.

   [.10] 9. (a) (i) No more than 30 days after the effective date of this ORDER, and at least annually thereafter, the Bank shall retain a qualified, independent individual or firm with recognized expertise in valuations of mortgage servicing rights ("Appraiser") to provide a written, independent market valuation of the carrying values of the Bank's purchased mortgage servicing rights ("market valuation"). The market valuation shall include consideration of any adjustments necessary to account for any significant changes in original valuation assumptions, including unanticipated prepayments. The name and qualifications of each such Appraiser considered for employment by the Bank shall be submitted for review by the Regional Director who shall have the right to disapprove such employment in writing within 20 days of receipt of notification.

   (ii) Immediately upon receipt of the market valuation required by paragraph 9(a)(i), the Bank shall adjust the carrying value of its purchased mortgage servicing rights as necessary to conform to the market valuation.

   [.11] 10. (a) The Bank shall not pay or declare any cash dividends without the prior written consent of the Regional Director and Kansas Bank Commissioner.
   (b) The Bank shall not increase the salaries of or pay additional compensation in the form of bonuses or otherwise to any Institution-Affiliated Party who is also a shareholder without the prior written consent of the Regional Director and Kansas Bank Commissioner.

   [.12] 11. No more than 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulations committed by the Bank as described on page 6-1 of the FDIC's Report of Examination of the Bank as of November 9, 1989.

   [.13] 12. No more than 30 days after the effective date of this ORDER, the Bank shall correct all deficiencies in internal routines and controls noted in the FDIC's Report of Examination (Electronic Data Processing) of the Bank as of November 15, 1989.

   [.14] 13. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (1) in conjunction with the Bank's next shareholder communication, and also (2) 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, Registration and Disclosure Unit, 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. The Bank shall furnish written progress reports to the Regional Director and the Kansas Bank Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof within 10 days after the last business day of each calendar month while this ORDER is in effect. In addition, the Bank shall furnish such reports on request of either the Regional Director or the Kansas Bank Commissioner. All progress reports shall be in such form and contain such information as the Regional Director or the Kansas Bank Com- {{4-1-90 p.C-373}}missioner may from time to time require. All progress reports and other written responses required by this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   This ORDER shall become effective ten (10) days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank, its Institution-Affiliated Parties, successors and assigns.
   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 this 18th day of May, 1990.