FDIC: 1993 - Docket No. FDIC-93-119b


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{{2-29-96 p.C-3235}}
[¶10,811] In the Matter of Midland Bank, Kansas City, Missouri, Docket No. FDIC-93-119b (5-28-93).

Bank to cease and desist from unsafe or unsound practices and violations of law and/or regulations. (This order was terminated by order of the FDIC dated 11-30-95. See ¶16,057.)

   [.1] Assets—Adversely Classified—Eliminate/Reduce
   [.2] Loans—Risk Position—Reduce—Written Plans Required
   [.3] Loan Loss Reserve—Establish/Maintain
   [.4] Real Estate—Reserve for Other Real Estate—Increase/Maintain
   [.5] Capital—Tier 1 Capital—Increase/Maintain—Report to State and FDIC
   [.6] Dividends—Restricted
   [.7] Directors and Officers—Indemnification for Settlements—Restricted
   [.8] Loans—Specific Individuals—Restricted
   [.9] Real Estate Loans—Restrictions
   [.10] Loans—Overdue—Accrual of Interest
   [.11] Management and Personnel—Comprehensive Review Required
   [.12] Loans—Internal Review Procedure
   [.13] Loan Policy—Written Revision—Minimum Requirements
   [.14] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.15] Technical Exceptions—Eliminate/Correct
   [.16] Loans—Concentrations of Credit—Reduction Plan
   [.17] Loan Participations—Restrictions
   [.18] Violations of Law—Eliminate/Correct
   [.19] Real Estate—OREO—Reporting Required
   [.20] Reports of Condition and Income—Amendment Required
   [.21] Brokered Deposits—Limitations on Transactions
   [.22] Profit Plan—Minimum Requirements
   [.23] Funds Management—Written Policy Required
   [.24] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.25] Board of Directors—Election—Outside Directors Added
   [.26] Audit—Outside Auditor—Internal and External Audit Program
   [.27] Loans—Classified and Special Mention—Status Reports to FDIC
{{2-29-96 p.C-3236}}
In the Matter of

MIDLAND BANK
KANSAS CITY, MISSOURI
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-93-119b
   Midland Bank, Kansas City, Missouri ("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 361.260, RSMo Cum. Supp. 1992 and 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 a representative of the Division of Finance and counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated May 27, 1993, 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 Director of the Division of Finance of the State of Missouri ("Commissioner") and the FDIC.
   The Commissioner and the FDIC considered the matter and determined that there was reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws and/or regulations. The Commissioner and 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 and take affirmative action to correct unsafe or unsound banking practices and conditions and violations of law and/or regulations, all as hereinafter set forth:
1. For purposes of this Order, the terms "immediate family" and "related interests" shall have the meaning attributed to such terms in Regulation O of the Federal Reserve Board, 12 C.F.R. 215.2, and the term "affiliate" shall have the meaning attributed to it by Section 23A of the Federal Reserve Act, 12 U.S.C. § 371c.

[.1] 2. Effective the effective date of this Order, the Bank shall reduce to zero the total amount of assets classified as "Loss" in the report of examination prepared by the Federal Deposit Insurance Corporation as of June 12, 1992, and also in any future examinations or visitations while this Order is in place. With respect to future examinations or visitations, as used in Paragraphs 2 and 3 of this Order, the action to be taken shall be taken immediately after the meeting at which the board is informed of the results of the examination or visitation.
3. The Bank shall, effective the effective date of this Order, reduce by fifty percent the total amount of Other Real Estate classified as "Doubtful" in the report of examination prepared by the Federal Deposit Insurance Corporation as of June 12, 1992, and also in any future examinations or visitations while this Order is in place, or, in the alternative, increase the Other Real Estate reserve in the amount of fifty percent of the Other Real Estate classified "Doubtful".

[.2] 4. Within sixty days of the effective date of this Order, the Bank shall develop and submit to the Commissioner and to the Regional Director of the Federal Deposit Insurance Corporation, hereinafter referred to as the "Regional Director", a written plan designed to reduce the risk position in each asset aggregating $1,000,000 or more which was classified or listed for special mention in the report of examination of June 12, 1992. The Bank shall thereafter comply with its written plan. In developing such a plan, the Bank shall, at a minimum:

[.3] 5. Effective the effective date of this Order, the Bank shall restore the reserve for {{7-31-93 p.C-3237}}loan losses to a level which is reasonable in relation to the degree of risk inherent in the Bank's loan portfolio. However, based on the June 12, 1992, report of examination, such increase shall cause the reserve for loan losses to equal at least $8,390,000, after the charge off of loans classified "Loss" net any payments received subsequent to the date of examination. The Bank shall, thereafter, maintain the reserve at a reasonable and adequate level, consistent with the Instructions for the Preparation of Consolidated Reports of Condition and Income.

[.4] 6. Effective the effective date of this Order, the Bank shall establish a reserve for Other Real Estate at a level which is reasonable in relation to the risk in the Bank's Other Real Estate portfolio. However, based on the June 12, 1992, report of examination, such increase shall cause the reserve for Other Real Estate to equal at least $3,035,000, after the charge off of Other Real Estate classified as "Loss" net any payments received subsequent to the date of examination. Included as part of the increase required by this paragraph shall be any increase resulting from compliance with Paragraph No. 3 of this Order. The Bank shall, thereafter, maintain the reserve at a reasonable and adequate level.

[.5] 7. Within forty-five days of the effective date of this Order, the Bank shall develop and submit to the Commissioner and to the Regional Director a plan, acceptable to the Commissioner and the Regional Director, by which the Tier 1 capital as defined in Section 325.2(t) of the FDIC's Rules and Regulations, 12 C.F.R. §325.2(t), of the Bank, after adjustments to the loan loss reserve and Other Real Estate reserve required by this Order, will be increased to and maintained at an amount which will equal at least seven percent of total assets as defined in Section 325.2(v) of the FDIC's Rules and Regulations, 12 C.F.R. §325.2(v). The plan shall contain specific time frames and sources for the injection of the capital. After the Bank has increased its Tier 1 capital to seven percent in accordance with the plan, if at anytime while this Order is in effect the Tier 1 capital ratio declines below seven percent, the Bank shall, within sixty days after the date on which said ratio so declined, submit to the Commissioner and to the Regional Director a written plan for approval describing the means and timing by which the Bank shall increase such ratio up to or in excess of seven percent. The Bank shall thereafter maintain its Tier 1 capital ratio at or in excess of such level.

[.6] 8. (a) The Bank shall not, as long as this Order is in effect, declare or pay dividends, pay management fees or bonuses, increase any executive's salary or other compensation, or pay any severance pay package without the prior written consent of the Commissioner and the Regional Director.

[.7] (b) Effective the effective date of this Order, the Bank shall not make any indemnification payment to or for the benefit of any present or former director or senior executive officer as defined in Section 38(b)(2)(H) of the Act, for expenses, including attorney's fees, judgments, fines and/or amounts paid in settlement in connection with any threatened, pending or completed action, suit, or proceeding, regardless of whether civil, criminal, administrative or investigate, except as required under Section 351.355.3, RSMo, without the prior written consent of the Commissioner and the Regional Director.
(c) Effective the effective date of this Order, for any indemnification claim of a present or former director or senior executive officer made against the Bank pursuant to Section 351.355.3, RSMo, the Bank shall not pay such claim unless and until the Bank's board of directors has (i) determined that such claim is in fact a valid claim under Section 351.355.3, RSMo, (ii) documented in its minutes the actions taken to make such determination and the factual bases supporting such claim for indemnification, and (iii) provided the Regional Director and Commissioner with copies of such minutes and supporting documentation at least sixty days prior to making any such payment.

[.8] 9. Effective the effective date of this Order, the Bank shall not extend credit, directly or indirectly, to or for the benefit of Leopold ("Lee") H. Greif or his related interests or immediate family.
10. (a) Effective the effective date of this Order, except as provided in Paragraph 10(b), the Bank shall not make any extension of credit secured by real estate with respect to which, at any time during the period commencing 36 months prior to the application date of the extension of {{7-31-93 p.C-3238}}credit ("disqualifying period") Lee Greif or any affiliate of the Bank, directly or indirectly, held any ownership interest, or any encumbrance or security interest (collectively "disqualifying interest"). As used in this Paragraph 10(a), "real estate" includes any improvements or fixtures located on such real estate.
(b) The prohibition of Paragraph 10(a) shall not apply to any extension of credit:

(c) The board of directors shall support the basis for making any extension of credit that would be secured by real estate in which a disqualifying interest exists, yet meets the exceptions guidelines as defined in this paragraph. The minutes of the board of directors and the relevant loan files shall include written documentation supporting the board's determination and approval of the transaction.
(d) The Bank shall support with written documentation the basis for its determination that any real estate, which serves as collateral for the Bank's extension of credit, has not been encumbered by a disqualifying interest. Such documentation shall include, at a minimum, an appraisal performed in accordance with the provisions of 12 C.F.R. Part 323 containing a three-year history of prior sales of the property which identifies ownership interests and encumbrances or security interests existing with respect to the real property during the disqualifying period, and a statement in the minutes of the meetings of the board of directors indicating that the board of directors has reviewed that history of prior sales, and that the board is satisfied that no disqualifying interest exists. If the appraisal does not contain the information necessary to make such a determination, the board shall obtain documentation consisting of an opinion letter of legal counsel or written commitment for title insurance from a title insurance company establishing current and prior ownership and any liens or encumbrances on the subject real estate and any improvements or fixtures located thereon in existence during the disqualifying period.

[.9] 11. Effective the effective date of this Order, the Bank shall cease and desist the practice of making any extension of credit which is secured by real estate (other than single-family, owner-occupied real estate) which the Bank owns or on which the Bank holds a mortgage, deed of trust, or any other encumbrance or security interest, unless:

[.10] 12. Effective the effective date of this Order, the Bank shall cease and desist and practice of accruing interest on any loan which is delinquent more than ninety days except when consistent with the Instructions for the Preparation of Reports of Condition.

[.11] 13. Effective the effective date of this Order, the Bank shall conduct a study of the management and personnel structure of the Bank to determine whether additional personnel are needed for the effective execution of the methods and procedures necessary for the safe and profitable operation of the Bank. The results of the study shall be submitted to the Commissioner and to the Regional Director within sixty days of the effective date of this Order. The study shall include a review of the duties, responsibilities, and compensation of the Bank's senior executive officers and a determination {{7-31-93 p.C-3239}}whether the compensation is reasonable. Remuneration paid to such directors, officers and employees shall be subject to the requirements of Paragraph 8 and have the prior approval of the board, which approval shall be properly documented and noted in the minutes.

[.12] 14. Within sixty days of the effective date of this Order, the Bank shall adopt and thereafter follow loan review procedures designed to identify and categorize problem loans. The loan review procedures shall include, at a minimum:

[.13] 15. Within sixty days of the effective date of this Order, the Bank shall review and revise the Bank's formal loan policy to address the weaknesses noted in the report of examination of June 12, 1992, and shall, thereafter, adhere to such loan policy except in those instances in which the board of directors of the Bank has made a prior determination that a variance from the policy is in the best interests of the Bank, with the reasons therefor noted in the credit file and the minutes of the board's meetings. The revised policy shall be forwarded to the Commissioner and to the Regional Director for their review and comment.

[.14] 16. The Bank shall not, with respect to the loans classified in the report of examination of June 12, 1992, rewrite any such loans to include interest accrued but unpaid nor shall it grant new loans for the purpose of paying any such interest accrued but unpaid or otherwise make additional extensions of credit except in those cases in which the board of directors has made a prior determination that the extensions of credit are in the best interests of the Bank and the reasons therefor noted in the credit file and the minutes of the board's meetings.

[.15] 17. The Bank shall, within sixty days of the effective date of this Order, take action to correct the technical exceptions noted in the report of examination of June 12, 1992, and shall, hereafter, cease and desist the practice of making loans without proper documentation. Included with the progress reports required in Paragraph No. 29 of this Order shall be a listing of the technical exceptions corrected since the last report.

[.16] 18. Within sixty days of the effective date of this Order, the Bank shall develop a written plan to reduce those concentrations of credit in loans noted in the report of examination of June 12, 1992, and shall implement procedures to monitor current concentrations and to avoid future concentrations of credit. The Bank shall thereafter follow the written plan. Such procedures shall, at a minimum, monitor concentrations by type of loan, geographic area, and individual borrower and his or her related interests.

[.17] 19. Effective the effective date of this Order, the Bank shall cease and desist the practice of buying participations in any asset from any affiliate unless done to meet contractual obligations which were in effect as of the date of this Order. This paragraph shall not prohibit the replacement or renewal of a participation in existence on the effective date of this Order, provided that:

[.18] 20. No more than sixty 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 {{7-31-93 p.C-3240}}and noted in the report of examination of June 12, 1992. For any violation of law or regulation for which correction is not accomplished due to conditions outside the control of the Bank, the Bank's board of directors shall maintain in its minutes, and include in the appropriate individual credit file, a written record of all actions taken by the Bank to correct such violations of law or regulations, including an express description of the condition which is outside of the control of the Bank. A copy of such written record shall be provided to the Commissioner and to the Regional Director within ten days of its approval by the Bank's board of directors, and any written comment provided by the Commissioner or the Regional Director to the Bank's board of directors regarding such record shall be reviewed at its next meeting subsequent to receipt of such comment and made part of the minutes of that board meeting.

[.19] 21. Within thirty days of the effective date of this Order, the Bank shall prepare a written list of all "Other Real Estate Owned" ("ORE"), including any loan that comes within the definition of "In-Substance Foreclosure" ("ISF") as defined in Financial Accounting Standards Board Statement #15, entitled "Accounting by Debtors and Creditors for Troubled Debt Restructurings", and consistent with the Instructions for the Preparation of Consolidated Reports of Condition and Income. The Bank shall:
(a) Require written monthly reports to the board of directors to be included in the monthly minutes of the board reflecting the status of the Bank's ORE and ISF, including:

   (b) Document, in the appropriate Bank record for each parcel of ORE and ISF, evidence of title, insurance (where necessary), and the payment of taxes;
   (c) Require, within thirty days of the effective date of this Order, an independent appraisal of each parcel of ORE and ISF exceeding a book value of $500,000 held by the Bank prior to the effective date of this Order, unless an independent appraisal complying with the requirements of Part 323 of the FDIC's Rules and Regulations was obtained within six months prior to the effective date of this Order, and require, within sixty days after acquisition, an independent appraisal of each parcel of ORE and ISF over $50,000 acquired after the effective date of this Order, unless an independent appraisal complying with the requirements of Part 323 of the FDIC's Rules and Regulations was obtained within six months prior to the date of acquisition.
   (d) Require that each appraisal of ORE and ISF be performed in accordance with the standards of Title XI of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989, and implemented by Part 323 of the Federal Deposit Insurance Corporation's Rules and Regulations for banks regulated by the Federal Deposit Insurance Corporation.
   (e) Establish a reasonable value at which each parcel of ORE and ISF will be listed for sale.
   (f) Require that any written offer to purchase any parcel of ORE or ISF shall be included in the appropriate ORE and ISF Bank record.

[.20] 22. 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 for the Preparation of Reports of Condition and Income, between January 1, 1992, and the effective date of this Order, shall, at a minimum, reflect the value of the Bank's Other Real estate, including In-substance foreclosures, allowance for loan and lease losses, and brokered deposits that should have been reported in accordance with said instructions. The Bank shall file amended Reports of Condition and Income if necessary to comply with this paragraph within ninety days of the date of this Order.

[.21] 23. (a) Effective the effective date of this Order, the Bank shall identify and list all brokered deposits, as that term is defined in Instructions for the Preparation of Consolidated Reports of Condition and Income. An updated and current listing of brokered deposits shall be maintained as {{7-31-93 p.C-3241}}part of the Bank's permanent records in order to accurately reflect the dollar amount of brokered deposits on each Report of Condition and Income. The Bank shall not solicit, accept, renew, or roll over any brokered deposit.
(b) The Bank shall also identify and list by name and location of the depositor each deposit from any depositor located beyond a fifty mile radius from the Bank ("out-of-area deposit"). During the period this Order is in effect, the Bank shall maintain an accurate and current list of each out-of-area deposit and shall update such list at least once each quarter. This list shall be made part of the Bank's permanent records.

[.22] 24. Within sixty days of the effective date of this Order, the Bank shall submit to the Commissioner and to the Regional Director a formal written profit plan for the remainder of 1993. It shall show each item of income and expense spread on a monthly and a year-to-date cumulative basis, beginning with January 1, 1993. The Bank shall also submit, within ninety days of the effective date of this Order, formal profit plans for 1994 and 1995. The profit plans shall contain monthly provisions for loan losses. The profit plans shall also project asset growth and dividend payout to ensure that equity capital is maintained at least at seven percent of total assets.

[.23] 25. Within sixty days of the effective date of this Order, the Bank shall develop and fully implement a written Investment and Funds Management Policy designed to assure adequate liquidity provisions are made for the Bank and incorporating specific plans for decreasing dependence on rate sensitive and potential volatile liabilities. Attached hereto are Guidelines which shall be incorporated in the Bank's Written Investment and Funds Management Policy. Such policy shall be submitted to the Commissioner and to the Regional Director for review and comment. The Bank shall thereafter follow its written Investment and Funds Management Policy.

[.24] 26. The Bank shall, within thirty days of the effective date of this Order, establish a committee that will ensure compliance with this Cease and Desist Order. The committee shall consist of Bank directors of which two-thirds of its number shall be independent with respect to the Bank as defined in Paragraph 27, below. 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 meetings 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.

   [.25] 27. The Bank shall, as soon as is reasonably possible, fill the vacancy on the board of directors and restore the board to a legal complement of five directors. The board of directors of the Bank shall also, within sixty days of the effective date of this Order, prepare a list of potential candidates for the board of directors for consideration by the shareholders of the Bank. The list of potential 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 Commissioner and the Regional Director within ninety days of the effective date of this Order.
   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, the members of the board of directors who are also shareholders 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 is necessary to cause a majority of the board of directors to be and to remain independent with respect to the Bank.
   For purposes of this Order, an individual who is "independent with respect to the Bank" shall be any individual who:

[.26] 28. Within sixty days of the effective date of this Order, the Bank shall enter into a contract with a qualified independent public accountant for the purpose of obtaining a surprise audit of the Bank's books and records. Further, the engagement letter detailing the scope of the audit to be performed will be submitted to the Commissioner and to the Regional Director for their approval. The Bank shall also immediately establish a system of internal routines and controls that are designed to provide an adequate audit trail. This system shall include an ongoing internal and external audit program.

[.27] 29. Within thirty days of the effective date of this Order, the Bank shall and each ninety days thereafter, advise the Commissioner and the Regional Director, by written report, of the Bank's actions taken to comply with each paragraph of this Order. Included with each report shall be the status and unpaid balance of each classified and special mention asset which exceeds $1,000,000, a copy of the minutes of each board meeting held since the last report was filed, the profit and loss statement and the Bank's balance sheet, all utilizing figures prepared as of the end of the previous month.
30. This Order shall become effective ten days after its issuance.

APPENDIX

GUIDELINES FOR WRITTEN
INVESTMENT AND FUNDS
MANAGEMENT POLICIES
A comprehensive funds management policy should address the following areas:
   1. Define and establish recordkeeping systems which track the volume of (a) ratesensitive 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, 1 year).
   2. Recognize the need to offset volumes and maturities of rate-sensitive liabilities with equal or similar amount of quality assets which mature or can be rate-adjusted at about the same time. Along these lines, a range of acceptable ratios for rate-sensitive assets to rate-sensitive liabilities should be made a part of the policy to protect the bank against excessive interest rate risk and insure that an adequate net interest margin is maintained.
   3. Define and establish recordkeeping systems which track the volume of (a) stable or core deposits, and (b) volatile deposits.
   4. Recognize the need to offset a substantial portion of the bank's volatile deposits and borrowings with liquid, short-term assets.
   5. State how funds derived from negotiable rate CDs and borrowings may be invested. Along these lines, establish a maximum large liability dependency ratio (the percentage of loans plus other long-term earning assets that may be funded by negotiable rate CDs and borrowings).
   6. Establish a range of acceptable loan/ deposit ratios, taking into account seasonal deposit fluctuations.
   7. Incorporate a borrowing policy which addresses:

8. Develop contingency plans for meeting large, unexpected withdrawals, such as:

9. Establish a funds management committee to meet at least monthly to determine how to best allocate the bank's available funding sources among various asset categories after reviewing:

The bank's funds management policy needs to be closely linked to its lending and investment policies and, of course, needs to be supported by balance sheet projections, income budgets, and adequate recordkeeping systems to track liquidity and rate-sensitivity relationships.

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