Federal Deposit
Insurance Corporation

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   [¶10,101] In the Matter of State Savings Bank, Aplington, Iowa, Docket No. FDIC-90-92b (8-9-90).

   Bank to cease and desist from such practices as operating with excessive volume of adversely classified assets; engaging in hazardous lending and lax collection practices and in violation of applicable laws and regulations; operating with management whose policies and practices are detrimental to the Bank; operating with inadequate loan documentation; engaging in practices which produce inadequate operating income; engaging in income directly or indirectly
{{12-31-90 p.C-490}}to Institution-Affiliated Parties; permitting use of Bank premises, equipment, and personnel by affiliate without obtaining reasonable compensation; engaging in the practice of improperly accounting for transactions with affiliates; failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and regulations; operating with inadequate loan loss reserves; and failing to submit adequate Reports of Condition and Income.

   [.1] Management—Qualifications—Compliance
   [.2] Management Plan—Minimum Requirements—Review
   [.3] Board of Directors—Outside Directors
   [.4] Definition—"Independent with Respect to Bank"
   [.5] Assets—Adversely Classified—Reduce/Eliminate
   [.6] Equity Capital Ratio-Minimum Amount—Calculation—Written Plan
   [.7] Loan Loss Reserve—Reporting—Review and Adequacy
   [.8] Loans—Extension of Credit—Existing Borrower—Curtail
   [.9] Loan Policy—Revise
   [.10] Profit Plan—Minimum Requirements—Review
   [.11] Funds Management and Liquidity—Minimum Requirements—Review
   [.12] Dividends—Restricted
   [.13] Board of Directors—Transactions with Affiliates or Interested Parties-Review
   [.14] External Audit Procedures—Minimum Requirements—Corrective Action
   [.15] Accruals for Income Tax Expenses—GAAS Standards—Review
   [.16] Shareholders—Disclosure—Cease and Desist

In the Matter of

STATE SAVINGS BANK
APLINGTON, IOWA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-90-92b
   State Savings Bank, Aplington, 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/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 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 August 7, 1990, whereby solely for the purpose of this proceeding and without admitting or denying any alleged 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 has engaged in unsafe or unsound banking practices and has 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 and unsound banking practices and violations of law and/or regulations:
   A. operating with an excessive volume of adversely classified assets;
   B. engaging in hazardous lending and lax collection practices, including maintaining an excessive volume of adversely classified loans;
   C. engaging in violations of applicable laws and regulations;
   D. operating with management whose policies and practices are detrimental to the Bank;
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   E. operating with deficient or inadequate loan documentation, including but not limited to current financial statements and cash flow and/or operating information;
   F. engaging in practices which produce inadequate operating income;
   G. engaging in any practice which may be construed as diverting, or permitting the diversion of, commissions, fees, and other Bank income (i) directly to an affiliate and (ii) indirectly to Institution-Affiliated Parties. For purposes of this ORDER, "affiliate" shall be defined as provided in section 23A(b)(1) of the Federal Reserve Act, 12 U.S.C. § 371c(b)(1);
   H. permitting the use of Bank premises, equipment, and/or personnel by any affiliate without obtaining reasonable compensation therefore;
   I. engaging in the practice of improperly accounting for transactions with affiliates;
   J. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and/or regulations;
   K. operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held; and
   L. failing to submit Reports of Condition and Income in accordance with prevailing instructions.
   IT IS FURTHER ORDERED, that the Bank, its Institution-Affiliated Parties and its successors and assigns, take affirmative action as follows:

   [.1] 1. (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 chief executive officer who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining the lending and investment policies of the Bank. The chief executive officer shall have an appropriate level of experience to perform the duties assigned to that individual by the Bank's board of directors. The Bank shall promptly notify the Regional Director of the FDIC's Kansas City Regional Office ("Regional Director") of the identity of said chief executive officer. 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. § 1831(i), the 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.

   (i) identification of both the type and number of officer positions needed to manage and supervise properly 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 each Bank officer 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

   [.3] (d)(i) Within 90 days from the effective date of this ORDER, the board of directors shall prepare a list of potential candidates for the board of directors for consideration by the shareholders of the Bank. The list of candidates shall include individuals who are independent with respect to the Bank, in such number that, if elected, would cause a majority of the board of directors to be independent with respect to the Bank. The actions taken in identifying potential candidates, including any communication with such individuals, shall be documented and made a part of the minutes of the board of directors. Copies of these board minutes shall be provided to the Regional Director within 120 days from the effective date of this ORDER.

   (ii) At the next meeting of the shareholders of the Bank, and at each succeeding meeting of the shareholders at which Bank directors are to be elected, any members of the board of directors who are also shareholders of the Bank shall nominate and support the election of candidates to the board of directors who are independent with respect to the Bank and who have agreed to stand for election to the board of directors, in such number as are necessary to cause a majority of the board of directors to be and to remain independent with respect to the Bank.

   [.5] 2. No more than 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" as of November 17, 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.

   [.6] 3. (a)(i) During the period this ORDER is in effect, 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 "equity capital" and "total assets" shall have the same meaning as those terms have in the prevailing Instructions for Preparation of Reports of Condition and Income ("Instructions").
   (ii) The equity capital ration shall be calculated as of the Report Date, as that term is used in the Instructions. For the purpose of calculating the
{{12-31-90 p.C-493}}equity capital ratio as of a given Report Date:
   (A) total equity capital shall be the amount of total equity capital required to be included in the Bank's Report of Condition for the Report Date;
   (B) total assets shall be the average of total assets required to be included in the Bank's Report of Condition for the Report Date and is found in the Call Report Schedule of quarterly averages;
   (C) total equity capital and total assets reported in the Bank's Report of Condition are to be calculated in accordance with the prevailing Instructions; and
   (D) the Bank shall have an adequate allowance for loan and lease losses in accordance with paragraph 4 of this ORDER.

   [.7] (b) If, during the period this ORDER is in effect, the equity capital ratio, exclusive of the allowance for loan and lease losses, declines below 6 percent, the Bank, within 30 days after the Report Date on which the said ratio so declined, shall develop and implement a written plan to increase such ratio up to or in excess of 6 percent. No more than 60 days after the implementation of the written plan, the Bank's equity capital ratio, exclusive of the allowance for loan and lease losses, shall equal or exceed 6 percent and the Bank shall thereafter maintain its equity capital ratio at or in excess of such level as calculated herein while this ORDER is in effect.
   (c) The Bank's board of directors shall maintain in its minutes a written record of any action taken by the Bank to comply with the capital requirements of paragraphs 3(a) and 3(b) of this ORDER.
   4. (a) The Bank shall maintain an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions.
   (b) Reports of Condition and Income required to be submitted by the Bank as of each Report date, as that term is used in the Instructions, between and including March 31, 1990, and the effective date of this ORDER, shall, at a minimum, reflect an allowance for loan and lease losses that should have been maintained in accordance with the Instructions. If necessary to comply with this paragraph, the Bank shall file amended Reports of Condition and Income within 10 days from the effective date of this ORDER.
   (c) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the board of directors of the Bank shall: (1) review the adequacy of the Bank's allowance for loan and lease losses, (2) provide for an adequate allowance, and (3) accurately report the allowance in any such Report of Condition and Income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the allowance, and the basis for determining the amount of allowance provided.

   [.8] 5. (a) Within 30 days from the effective date of this ORDER, the board of directors shall develop a written plan of action to lessen the Bank's risk position in each line of credit aggregating $40,000 or more which was classified "Substandard" or "Doubtful" as of November 17, 1989. In developing such plan, the Bank shall, at a minimum:

   (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
   (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.

   (b) The written plan of action described by paragraph 5(a) and any subsequent modification thereto shall be submitted to the Regional Director and the Superintendent of Banking for the State of Iowa ("Superintendent") for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written plan of action, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its Institution-Affiliated Parties shall follow the written plan of action and/or any subsequent modification.

   [.9] 7. No more than 60 days from the effective date of this ORDER, the Bank shall revise its written loan policies which revision shall include, at a minimum, (i) guidelines for rates of interest and terms of repayment for secured and unsecured loans and (ii) procedures for obtaining and reviewing real estate appraisals and reappraisals. The revised written loan policies and any subsequent modification thereto shall be submitted to the Regional Director and the Superintendent for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written loan policies and/or any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its Institution-Affiliated Parties shall follow the written loan policies and/or any subsequent modification thereto.

   [.10] 8. (a) No more than 30 days from the effective date of this ORDER, the Bank shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:

   (i) identification of the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance;
   (ii) realistic and comprehensive budgets;
   (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
   (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   [.11] 9. (a) No more than 30 days from the effective date of this ORDER, the Bank shall revise its written funds management policy, which revision shall include, at a minimum:

   (i) adequate recordkeeping systems to track the volume of (A) rate-sensitive assets and (B) rate-sensitive liabilities. Rate-sensitive assets and liabilities are generally defined as those that either mature or can be repriced during a specified time period (90 days, 180 days, one year);
   (ii) a range of acceptable ratios for rate-sensitive assets to rate-sensitive

   (iii) adequate recordkeeping systems to track the volume of (A) stable or core deposits and (B) volatile deposits;
   (iv) guidelines for adequatley offsetting a substantial portion of the bank's volatile deposits and borrowing with liquid, short-term assets;
   (v) investment guidelines for funds derived from negotiable-rate certificates of deposit and borrowing, including a maximum large liability dependency ratio. A large liability dependency ratio means the percentage of loans plus other long-term earning assets that may be funded by negotiable-rate certificates of deposit and borrowing;
   (vi) a range of acceptable loan-to-deposit ratios, taking into account seasonal deposit fluctuations;
   (vii) a borrowing policy which addresses: (A) when or under what conditions the bank may borrow, (B) maximum amounts that may be borrowed, (C) a list of acceptable creditors, and (D) which officers are authorized to borrow;
   (viii) contingency plans for meeting large, unexpected withdrawals, which should include: (A) curtailing lending activity with priority given to specific types of credit and (B) establishing lines of credit with other financial institutions which will advance funds on short notice; and
   (ix) a funds-management committee to meet at least monthly to determine how best to allocate the bank's available funding sources among various asset categories after reviewing: (A) the bank's liquidity position, (B) outstanding commitments such as loan commitments and letters of credit, and (C) the bank's rate-sensitivity position and net interest margin.

   (c) The revised written funds management policy and any subsequent modification thereto shall be submitted to the Regional Director and the Superintendent for review and comment. No more than 30 days from the receipt of any comment from the Regional Director, the board of directors shall approve the revised written funds management policy and any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its Institution-Affiliated Parties shall follow the written funds management policy and/or any subsequent modification thereto.

   [.13] 11. Except for the payment of income taxes in accordance with the FDIC Statement of Policy entitled "Income Tax Remittance by Banks to Holding Company Affiliates," 43 Fed. Reg. 22,241 (1978), and other legitimate Bank expenses, the board of directors shall immediately (i) abrogate or rescind any motion, resolution, or other board action in effect which may be construed as authorizing or permitting, and (ii) discontinue any practice which may be construed as resulting in, the distribution, diversion, or transfer of Bank income of any kind whatsoever to or for the benefit of any affiliate or subsidiary of the Bank, any Institution-Affiliated Party, or the related interest of any Institution-Affiliated Party.
   12. Effective the date of this ORDER, the Bank and its Institution-Affiliated Parties shall not make, cause to be made, or permit in any way whatsoever any payment of money or the furnishing of services to any affiliate of the Bank, unless the said payment of money or furnishing of services is in compliance with all applicable provisions of sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. §§ 371c and 371c-1, and any other applicable state or federal banking law and/or regulation.
   13. (a) No more than 60 days from the effective date of this ORDER, the Bank shall correct the technical exceptions on
{{12-31-90 p.C-496}}loans noted on pages 2-d and 2-d-1 of the FDIC's Report of Examination of the Bank as of November 17, 1989. For any technical exception with respect to which correction is impracticable or impossible due to the pending bankruptcy, incapacity, absence, or other conduct or condition of the borrower outside the reasonable control of the borrower or the Bank, the Bank shall promptly correct the technical exception when the impediment to correction is removed. The Bank's board of directors shall maintain in its minutes a written record of all actions taken by the Bank to comply with the requirements of this paragraph 13(a), including specifically noting the conduct and/or conditions making correction of any technical exception impracticable or impossible.

   (b) No more than 60 days from the effective date of this ORDER, the Bank shall correct the internal routine and controls deficiencies noted on page 6-a of the FDIC's Report of Examination of the Bank as of November 17, 1989.

   (b) (i) Such restitution or reimbursement shall not be paid for or funded, directly or indirectly, from or by the use of the Bank's assets in any manner whatsoever, including by means of any extension of credit from said Bank. As used in this ORDER, "extension of credit" means the same as defined in section 215.3 of Regulation O of the Board of Governors of the Federal Reserve System ("Regulaton O"), 12 C.F.R. § 215.3.

   (ii) The prohibition against the use of Bank assets to pay for or fund the restitution or reimbursement required shall not include the regular and customary payment by the Bank of salaries and directors' fees for work performed for participation in the conduct of the affairs of the Bank.

   (i) the diversion of Bank income, including loan origination fees, loan participation servicing fees, overdraft charges, government interest subsidies on student loans, letter of credit fees, demand deposit account analysis charges, securities gains, auction sales commissions, and other Bank income of any kind whatsoever to the Bank's affiliates, directors, and/or executive officers;
   (ii) the payment with Bank funds of expenses incurred by, or on behalf of, the Bank's affiliates, directors, and/or executive officers;
   (iii) the utilization of the Bank's premises and other property, equipment and personnel in connection with the operations of any affiliate of the Bank; and
   (iv) the pro-rata amounts of each item specified in paragraphs 16(a)(i), (ii) and (iii) of this ORDER which were used for the tangible economic benefit of, or were transferred to, any director or executive officer.

   (b) At its next regular meeting, or in any event not more than 30 days, after the completion of the study or audit,

Bank's board of directors shall hold a meeting of the board to review the findings of the study or audit, and shall report those findings in the minutes of that board of directors meeting. A copy of the relevant board of directors' minutes, together with a copy of the study or audit and a statement of qualifications of the person(s) who prepared the study or audit, shall be immediately provided to the Regional Director and the Superintendent for review and comment.
   (c) Based on the actual findings of the study or audit required by paragraph 16(a) of this ORDER, the Bank's board of directors shall:

   (i) determine the amount of Bank income diverted, if any, directly or indirectly, to the Bank's affiliates, directors, and/or executive officers. The Bank's board of directors shall expressly record in the minutes of said meeting: (i) the total amount of diverted Bank income, (ii) the pro rata amounts which went, directly or indirectly, to the use or tangible economic benefit of, or were transferred to, any affiliate, director, or executive officer, and (iii) the identity of any affiliate, director, or executive officer concerned.
   (ii) determine the amounts of unreimbursed expenses, if any, which were paid by the Bank on behalf of the Bank's affiliates, directors, and/or executive officers. The Bank's board of directors shall expressly record in the minutes of said meeting: (i) the total amount of any such unreimbursed expenses, (ii) the pro rata amounts which went, directly or indirectly, to the use or tangible economic benefit of, or were transferred to, any affiliate, director, or executive officer, and (iii) the identity of any affiliate, director, or executive officer concerned.
   (iii) determine the actual uncollect cost to the Bank, if any, resulting from the use of Bank premises, property, and personnel for the tangible economic benefit of any affiliate, director, and/or executive officer. The Bank's board of directors shall expressly record in the minutes of the said meeting: (i) the total amount of any such uncollect cost, (ii) the pro rata amount of each item which went, directly or indirectly, to the use or tangible economic benefit of, or was transferred to, any affiliate, director, or executive officer, and (iii) the identity of any affiliate, director, or executive officer concerned.

   (d) Within 30 days after the receipt of any comment from the Regional Director pursuant to paragraph 16(b), the Bank shall take all reasonable steps, including the commencement of legal action, to obtain restitution or reimbursement from any affiliate, director, and/or executive officer that according to the results of the study or audit received, directly or indirectly, tangible economic benefit from, or were transferred, any portion of the following amounts: (i) income diverted to any affiliate, director and/or executive officer which exceeded the amount in paragraph 15(a) of this ORDER, (ii) expenses of the Bank's affiliates, directors and/or officers which were paid by the Bank and not reimbursed, and/or (iii) various costs described in paragraph 16(a)(iii) of this ORDER which were incurred by the Bank in excess of payments received from affiliates.
   (e) If the results of such study or audit disclose any material error or improper entry in any account of the Bank, the Bank shall amend its records to correct any such material error or improper entry and immediately notify the Regional Director and Superintendent in writing of the material error or improper entry and immediately notify the Regional Director and Superintendent in writing of the material error or improper entry uncovered and the corrective action taken. If such error or entry resulted in improper filings of the Bank's Reports of Condition and Income, the Bank shall file amended Reports of Condition and Income as required by the Regional Director.
   (f) Within 45 days of receipt of the findings of the study or audit, the Bank's board of directors shall finalize and implement a written policy governing all transactions between the Bank and (1) its affiliates and/or (2) its Institution-Affiliated Parties, including but not limited to the following items:

   (i) procedures to assure that any transaction between the Bank and any affiliate or any Institution-Affiliated Party is only on terms and under circumstances, (A) that are substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies or banks, and (B) that in good faith would be offered to, or would apply to, nonaffiliated companies or banks. A written record of the board of directors' determination and approval of each transaction between the Bank and any affiliate, including the basis for concluding that such transaction conforms to the written policy, shall be recorded in and made a part of the minutes of the board of directors.
   (ii) A requirement that the Bank's affiliates promptly pay the Bank the fair market cost for using the Bank's premises or other property, equipment and/or personnel. Any such payment shall not be less than the actual cost to the Bank.
   (iii) A requirement that the Bank's shareholders be promptly and completely informed in writing of the Bank's dealings with its affiliates and Institution-Affiliated Parties.

   [.16] 18. 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 of 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.
   19. The Bank shall furnish written progress reports to the Regional Director and the Superintendent detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof every 90 days, beginning 90 days from the effective date of the ORDER. In addition, the Bank shall furnish such reports on request of either the Regional Director or the Superintendent. All progress reports and other written responses to 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 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 9th day of August, 1990.