Federal Deposit
Insurance Corporation

{{7-31-93 p.C-2499}}
   [¶10,586] In the Matter of First State Bank of Patoka, Patoka, Illinois, Docket No. FDIC-92-194b (7-2-92).

   Bank to cease and desist from such unsafe or unsound practices as following hazardous lending and lax collection practices; operating with an inadequate loan policy; operating with inadequate allowance for loan and lease losses; operating with inadequate liquidity; operating in violation of applicable laws or regulations; operating with management whose policies are detrimental to the Bank; failing to provide adequate supervision over the Bank's affairs; and operating with management whose policies are detrimental to the Bank. (This order was terminated by order of the FDIC dated 5-5-93; see ¶ 15,666.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Loans—Risk Position—Reduce—Written Plans Required
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Loans—Overdue—Collection Policy
   [.7] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.8] Loan Policy—Written Revision—Minimum Requirements
   [.9] Loan Committee—Membership and Duties
   [.10] Allowance for Loan and Lease Losses—Establish/Maintain
   [.11] Profit Plan—Minimum Requirements
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   [.12] Funds Management and Liquidity—Written Policy Required
   [.13] Assets—Adversely Classified—Eliminate/Reduce
   [.14] Dividends—Restricted
   [.15] Violations of Law—Eliminate/Correct
   [.16] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.17] Shareholders—Disclosure—Cease and Desist Order
   [.18] Compliance Reports—Frequency

In the Matter of

FIRST STATE BANK OF PATOKA
PATOKA, ILLINOIS
(Insured State Nonmember Bank)
FDIC-92-194b
   First State Bank of Patoka, Patoka, Illinois ("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 or regulation alleged to have been committed by the Bank, and of its right to a hearing on the charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated June 18, 1992, whereby, solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices and violations of law or regulation, 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 or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   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 or regulation:
   A. Engaging in hazardous lending and lax collection practices, as evidenced by an excessive volume of adversely classified loans in relation to its level of capital protection.
   B. Operating with an inadequate loan policy.
   C. Operating with an inadequate allowance for loans and lease losses for the volume, kind, and quality of loans and leases held.
   D. Operating with inadequate liquidity in light of the Bank's asset and liability mix.
   E. Violating:

   1) The safe and sound banking practice requirements of section 23A of the Federal Reserve Act ("section 23A"), 12 U.S.C. § 371c(a)(4);
   2) The appraisal requirements of section 323.4 of the FDIC Rules and Regulations, 12 C.F.R. § 323.4; and
   3) The restrictions on the payment of interest on demand deposits of section 329.2 of the FDIC Rules and Regulations, 12 C.F.R. § 329.2.

[.1] 1. (a) Within 120 days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall in- {{9-30-92 p.C-2501}}clude: (i) a qualified chief executive officer with proven ability in managing a bank of comparable size and experience in upgrading a low quality loan portfolio; and (ii) a qualified senior lending officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Bank's loan portfolio. Such persons shall be provided the necessary written authority to implement the provisions of this ORDER. The qualifications of management shall be assessed on its ability to:

   (i) comply with the requirements of this ORDER;
   (ii) operate the Bank in a safe and sound manner;
   (iii) comply with applicable 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, and liquidity.

   (b) During the life of this ORDER, the Bank shall notify the Regional Director of the Chicago Regional Office of the FDIC ("Regional Director") in writing of any changes in any of the Bank's management. For purposes of this ORDER, "management" is defined as members of the board of directors and "Senior executive officers," as that term is defined in section 303.14 of the FDIC Rules and Regulations ("section 303.14"), 12 C.F.R. § 303.14. 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 and section 303.14.

[.2] 2. (a) Within 15 days from the effective date of this ORDER, the Bank shall retain a bank consultant acceptable to the Regional Director. Within 60 days from the effective date of this ORDER, the consultant shall develop a written analysis and assessment of the Bank's management and staffing needs, with emphasis on the lending function, including loan department and credit administration personnel ("Management Plan"), for the purpose of providing qualified management for the Bank. The Management Plan shall include, at a minimum:

   (i) identification of both the type and number of officer positions needed to properly manage and supervise the affairs of the Bank, as well as the minimum qualifications needed for each officer position;
   (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
   (iii) evaluation of all Bank officers and staff members to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and restoration and maintenance of the Bank in a safe and sound condition; and
   (iv) a plan to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications to fill those officer or staff member positions identified by this paragraph of the ORDER.

   (b) The Management Plan and any subsequent modification thereto shall be submitted to the Regional Director for review and comment. Within 30 days from the receipt of any comment from the Regional Director and after consideration of such comment, the Bank shall approve the Management Plan or any subsequent modifications, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank shall implement and follow the Management Plan and any subsequent modification.

   (i) the sale of common stock; or
   (ii) the elimination of all or part of the assets classified "Loss" as of December 13, 1991 without loss or liability to the Bank, provided any such collection on a partially charged-off asset shall first be applied to that portion of the asset which was not charged off pursuant to this ORDER; or
   (iii) the collection in cash of assets previously charged-off; or
   (iv) the direct contribution of cash by the directors and/or the shareholders of the Bank or its holding company; or
   (v) any other means acceptable to the Regional Director; or
   (vi) any combination of the above means.

[.4] 4. (a) Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan to reduce the Bank's risk position in each asset in excess of $50,000 which is classified "Substandard" in the FDIC's Report of Examination as of December 13, 1991 ("Report"). A copy of the written plan shall be submitted to the Regional Director upon its completion. 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.

   (i) dollar levels to which the Bank shall reduce each asset within 6 and 12 months from the effective date of this ORDER; and
   (ii) provisions for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors.

   [.5] 5. While this ORDER is in effect, the Bank shall not advance additional funds {{9-30-92 p.C-2503}}or renew a loan to any borrower whose loan is listed for technical exception on page 2-e of the Report, unless all of the technical exceptions listed for that borrower have been corrected.

   [.6] 6. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan for the reduction and collection of delinquent loans. Said plan shall include, at a minimum, provisions which: (1) prohibit the extension of credit for the payment of interest; and (2) establish acceptable guidelines for the collection of delinquent credits. A copy of the written plan shall be submitted to the Regional Director upon its completion. Such plan shall include, but not be limited to, the following:

   (a) dollar levels to which the Bank shall reduce delinquencies within 6 and 12 months from the effective date of this ORDER; and
   (b) provisions for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors.

[.8] 8. (a) Within 60 days from the effective date of this ORDER, and annually thereafter, the board of directors of the Bank shall review the Bank's loan policy and procedures for adequacy and, based upon this review, shall make all appropriate revisions to the policy necessary to strengthen lending procedures and abate additional loan deterioration. The revised written loan policy and any subsequent modifications shall be submitted to the Regional Director for review and comment upon completion.
   (b) The initial revisions to the Bank's loan policy required by this paragraph, at a minimum, shall include provisions:

   (i) Establishing standards for appraisals on real estate securing loans of more then $100,000 and loans of $100,000 and under. These standards shall conform with the requirements of Part 323 of FDIC Rules and Regulations, 12 C.F.R. Part 323, and Bank Letter 40–87.
   (ii) Establishing review and monitoring procedures to ensure that all lending personnel are adhering to the established procedures and that the directorate is receiving timely and fully documented reports.
   (iii) Requiring that all extensions of credit originated or renewed be supported by current credit information and collateral documentation, including lien searches and the perfection of security interests; have a clearly defined and stated purpose; and have a predetermined and realistic repayment source and schedule. Additionally, documentation for commercial, commercial real estate and agricultural loans shall include current financial information, profit and loss statements or copies of tax returns, and cash flow projections, and shall be maintained throughout the term of the loan with loan officer notations and comments.
   (iv) Requiring loan committee review and monitoring of the status of repayment and collection of overdue and maturing loans, as well as those loans which were classified "Substandard" in the Report.
   (v) Requiring the establishment and maintenance of a loan grading system and internal loan watch list.
   (vi) Requiring a written plan to lessen the risk position in each line of credit identified as a problem credit on the Bank's internal loan watch list.
   (vii) Establishing a dollar threshold for prior approval by the Bank's loan committee for any extension of credit, renewal, or disbursement in an amount which when aggregated with all other extensions of credit to that person and related interests of that person, exceeds $50,000. For the purpose of this paragraph "related interest" is defined as that term is defined in section 215.2(k) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. § 215.2(k).
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   (viii) Requiring a nonaccrual policy in accordance with the Federal Financial Institutions Examination Council's ("FFIEC") Instructions for the Consolidated Reports of Condition and Income.
   (ix) Requiring accurate reporting of past due loans to the loan committee on at least a monthly basis.
   (x) Addressing concentration of credit and diversification of risk, including goals for portfolio mix, establishment of limits within loan and other asset categories, and development of a tracking and monitoring system for the economic and financial condition of specific geographic locations, industries, and groups of borrowers.
   (xi) Establishing standards for the institution of collection efforts by the loan officer or legal counsel, and procedures to ensure timely recognition of loss through charge-odd, where appropriate.
   (xii) Prohibiting the extension of a maturity date, advancement of additional credit or renewal of a loan to a borrower whose obligations to the Bank were classified "Substandard" or "Doubtful" whether in whole or in part, in the Report, or by the FDIC or State authority in a subsequent Report of Examination, without the full collection in cash of accrued and unpaid interest, unless the loans are well secured and/or are adequately supported by current and complete financial information, and the renewal or extension has first been approved in writing by a majority of the Bank's board of directors.
   (xiii) Requiring that collateral appraisals be completed prior to the making of secured extensions of credit. In addition, periodic collateral valuations shall be performed for all secured "problem loans."
   (xiv) Requiring that all loans purchased from affiliate or other banks meet the standards of the Bank's loan policy before any funds are advanced for the purchase.

   (c) Within 30 days from the receipt of any comments from the Regional Director and after consideration of any comments the board of directors shall approve and implement the written loan policy and any subsequent modification thereto. The approvals shall be recorded in the minutes of a board of directors' meeting.

   (i) Evaluate, grant, and/or approve loans in accordance with the Bank's loan policy.
   (ii) Review and monitor the status of repayment and collection of overdue and maturing loans, as well as all other loans that were classified "Substandard" in the Report, or that are included on the Bank's internal watch list.
   (iii) Review and give prior written approval for all advances, renewals, or extensions of credit to any borrower or the borrower's related interests when the aggregate volume of credit extended to the borrower and the borrower's related interests exceeds $50,000. For purposes of this ORDER the term "related interest" is defined pursuant to section 215.2(k) of Regulation O, 12 C.F.R. § 215.2(k).
   (iv) Maintain written minutes of the committee meetings which include a record of the review and status of the aforementioned loans. Such minutes shall be made available at the next Bank board of directors' meeting.

[.10] 10. (a) Within 10 days from the effective date of this ORDER, the Bank shall replenish its allowance for loan and lease losses ("ALLL") by an expense entry in an amount equal to those loans required to be charged off by this ORDER.
   (b) Within 10 days from the effective date of this ORDER, the Bank shall make an additional provision for loan and lease losses which, after review and consideration by the board of directors, reflects the potential for further losses in the remaining loans or leases classified "Substandard" and all other loans and leases in its portfolio.
   (c) Within 30 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to December 13, 1991, shall be amended and refiled if they do not reflect a provision for {{3-31-00 p.C-2505}}loan and lease losses and an ALLL which are adequate considering the condition of the Bank's loan portfolio, and which, at a minimum, incorporate the adjustments required by the above subparagraphs of this ORDER.
   (d) Prior to submission or publication of all Reports of Condition and Income required by the FDIC after the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's ALLL and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the findings of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.

[.11] 11. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director for review and comment, a written profit plan and a realistic, comprehensive budget for all categories of income and expense for calendar year 1992. The plan and budget shall also be formulated and submitted for each successive calendar year while this ORDER remains in effect. The plan and budget shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the Bank's overall earnings, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components and shall describe any projected gains or losses on the sale of assets or from trading account activity. The plan and budget shall be coordinated with the loan, investment and funds management policies, so as to eliminate any inconsistent or contradictory objectives.
   (b) Within 30 days after the end of each calendar quarter, the Bank's board of directors shall evaluate the Bank's actual performance in relation to the plan and budget required by this paragraph and record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors' meeting at which such evaluation is undertaken.
   (c) Profit plans and budgets required by this ORDER for successive years shall be submitted 30 days prior to the end of each calendar year for which this ORDER is in effect. Within 30 days of receipt of any comments from the Regional Director, and after consideration of all such comments, the Bank shall approve and implement the plan(s) and budget(s). Such approval shall be recorded in the minutes of a board of directors' meeting.

   [.12] 12. Within 60 days from the effective date of this ORDER, the board of directors shall develop and implement a funds management policy that addresses the liquidity and rate sensitivity positions. The policy shall, at a minimum, include the following:

   (a) maximum dollar gap level at three-, six-, and twelve-month time horizons;
   (b) target ratios for the gap to total assets at three-, six-, and twelve-month time horizons;
   (c) strategies to bring the Bank into conformance with the standards established in subparagraphs (a) and (b) above;
   (d) provisions for maintaining a minimum liquidity ratio of 30%, as calculated on page 5-a of the Report;
   (e) provisions for eliminating the Bank's reliance on volatile liabilities, as calculated on page 5-a of the Report;
   (f) provisions for a maximum ratio of total loans to total deposits of 65%; and
   (g) a restriction on borrowings by the Bank to that amount required for occasional and temporary seasonal credit needs and to meet deposit withdrawals.

[.14] 14. (a) As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend without the prior written consent of the Regional Director, if the amount of the cash dividend will exceed net income for that dividend period or if the Bank's capital ratio is less than 7 percent with an adequate ALLL. An "adequate ALLL" will be considered an ALLL in compliance with paragraph 10 of this ORDER.
   (b) While this ORDER is in effect, the {{3-31-00 p.C-2506}}Bank shall not declare or pay any cash dividends without providing a minimum of 30 days advance written notice to the Regional Director.

[.15] 15. (a) Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law or regulation listed on pages 6-a and 6-a-1 of the Report.

   (b) Within 60 days from the effective date of this ORDER, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.17] 17. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER: (1) in conjunction with the Bank's next shareholder communication; and (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, notice, or statement shall be sent to the FDIC in Washington, D.C. 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.

   [.18] 18. Within 30 days of the end of each calendar quarter following the effective date of this ORDER, the Bank shall furnish to the Regional Director written progress reports signed by each member of the Bank's board of directors, detailing the 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, in writing, released the Bank from making further reports.
   The effective date of this ORDER shall be 10 days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and any successors and assigns thereof.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, and provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated: July 2, 1992.
   Pursuant to delegated authority.