Federal Deposit
Insurance Corporation

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   [¶11,665] In the Matter of Farmers Exchange Bank, Antlers, Oklahoma, Docket No. 99-088b, OSBD-99-C&D-2 (11-2-99)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 11-21-00; see ¶16,270.)

   [.1] Management—Qualifications Specified
   [.2] Assets—Adversely Classified Assets—Reduction Required
   [.3] Assets—Tier 1 Capital
   [.4] Dividends—Dividends Restricted
   [.5] Loan Loss Reserve—Establishment of or Increase in Required
   [.6] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits
   [.7] Technical Exceptions—Correction of Technical Exceptions Required
   [.8] Loan Policy—Preparation or Revision of Policy Required
   [.9] Violations of Law—Correction of Violations Required
   [.10] Reports of Condition and Income—Nonaccrual Status
   [.11] Loan Policy—Review Committee Established
   [.12] Board of Directors—Outside Directors Added to Board
   [.13] Board of Directors—Committee to Review Compliance with Cease and Desist Order Required
   [.14] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of

FARMERS EXCHANGE BANK
ANTLERS, OKLAHOMA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-99-088b
OSBD-99-C&D-2
   The Farmers Exchange Bank, Antlers, Oklahoma (``Bank''), through its board of directors, having been advised of its right to the issuance and service of 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 the alleged charges under section 8(b) of the Federal Deposit Insurance Act (``Act''), 12 U.S.C. §1818(b), section 204(B) of the Oklahoma Banking Code (the ``Code''), 6 O.S. 204(B), and the provisions of the Oklahoma Administrative Procedures Act (75 O.S. Section 250 et seq.), 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'') and the Banking Commissioner of the State of Oklahoma (``Commissioner'') dated October 29, 1999, whereby, solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and/or regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST (``ORDER'') by the FDIC and the Commissioner. The FDIC and the Commissioner considered the matter and determined they had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws and/or regulations. The FDIC and the Commissioner, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS ORDERED, that the Bank and institution-affiliated parties of the Bank cease and desist from the following unsafe or unsound banking practices and violations of laws and/or regulations:
   (a) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   (b) Operating the Bank without adequate supervision and direction by the board of directors over the management of the Bank;
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   (c) Operating the Bank without a senior loan officer qualified to administer a portfolio heavily concentrated in forestry and associated trucking related credits;
   (d) Operating with an inadequate level of capital protection;
   (e) Operating the Bank with an excessive level of adversely classified assets;
   (f) Engaging in hazardous lending and ineffective and lax collection practices;
   (g) Failing to provide an adequate allowance for loan and lease losses;
   (h) Operating the Bank in contravention of written loan policies and procedures;
   (i) Renewing or extending credit without adequate and appropriate supporting documentation;
   (j) Operating the Bank with inadequate earnings to fund growth, support dividend payments, and augment capital;
   (k) Creating concentrations of credit as more fully set forth on page 44 of the Report of Examination of the Bank as of March 15, 1999;
   (l) Operating the Bank in violation of applicable Federal and State laws and regulations as more fully set forth on pages 19–20 of the Report of Examination of the Bank as of March 15, 1999; and
   (m) Failing to accurately reflect the condition of the Bank in published statements and Consolidated Reports of Condition and Income.
   IT IS FURTHER ORDERED, that the Bank take affirmative action as follows:

   [.1]1. Within 60 days after the effective date of this ORDER, the Bank shall review the performance of current Bank management and the accuracy of Bank position responsibilities as well as overall staffing requirements, and develop a written plan to improve Bank management. The review shall be conducted and the plan developed by an outside consulting firm reporting to the Board. The plan may include the addition, dismissal, or reassignment of Bank officers and staff. The plan should satisfactorily address the need for a senior lending officer qualified to administer a loan portfolio that is heavily concentrated in forestry related and trucking loans. The plan shall be submitted to the Regional Director of the FDIC's Dallas Regional Office (``Regional Director'') and the Commissioner for review and comment. The Bank shall then immediately initiate actions to have and retain adequate and qualified staff. Each member of management shall possess qualifications and experience commensurate with his or her duties and responsibilities at the bank. The qualifications of the Bank loan officers shall further include inappropriate level of lending, collection, and loan supervision experience for the type and quality of the Bank's loans. The qualifications of management personnel shall also be evaluated on their ability to:

   (i) comply with the requirements of the 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 effectives, and liquidity.

   [.2]2. (a) Upon the effective date of this ORDER, the Bank shall, to the extent that it has not previously done so, eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as a result of the examination of the Bank as of March 15, 1999. Reduction of these assets through proceeds of loans made by the Bank shall not be considered ``collection'' for the purpose of this paragraph.
   (b) Within 60 days after the effective date of this ORDER, the Bank shall submit a written plan to the Commissioner and Regional Director to reduce the remaining assets classified Substandard as of March 15, 1999. The plan shall address each asset so classified with a balance of $100,000 or greater and provide the following:

   (i) The name under which the asset is carried on the books of the Bank;
   (ii) Type of asset;
   (iii) Actions to be taken in order to reduce the classified asset; and,

   (iv) Time frames for accomplishing the proposed actions.

   (i) Charge-off;
   (ii) Collection;
   (iii) Sufficient improvement in the quality of adversely classified assets so as to warrant removing any adverse classifications, as determined by the FDIC or State examiners; or
   (iv) Increase of total equity capital and reserves.

   [.3]3. (a) During the term of this ORDER, the Board shall maintain a minimum Tier 1 Leverage Capital Ratio as defined in Part 325 of the FDIC Rules and Regulations, of 7.5%.
   (b) If the ratio of adjusted Tier 1 capital to adjusted total assets falls below 7.5%, the bank shall submit to the Commissioner and the Regional Director, within 15 days, a capital plan (``Plan'') to meet the Tier 1 capital requirement of Paragraph 3(a). After the Commissioner and the Regional Director respond to the Plan, the board of directors of the Bank shall adopt the Plan, including any modifications or amendments requested by the Commissioner and the Regional Director. Thereafter, the Bank shall immediately initiate measures detailed in the Plan, to the extent such measures have not been previously initiated.

   [.4]4. While this ORDER is in effect, the Bank shall neither declare nor pay, directly or indirectly, any cash dividend to shareholders without the prior written consent of the Regional Director and the Commissioner. Such consent shall not be unreasonably withheld.

   [.5]5. (a) Within 10 days after the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate allowance for loan and lease losses. Such allowance shall be funded by charges to current operating income. Prior to the end of each calendar quarter, the board of directors of the Bank shall review the adequacy of the Bank's allowance for loan and lease losses. Such reviews shall include, at a minimum, the Bank's loan loss experience, an estimate of potential loss exposure in the portfolio, trends of delinquent and non-accrual loans and prevailing and prospective economic conditions. The minutes of the board meetings at which such reviews are undertaken shall include complete details of the reviews and the resulting recommended increases in the allowance for loan and lease losses.
   (b) Within 10 days after the effective date of this ORDER, the Bank shall review Consolidated Reports of Condition and Income filed with the FDIC on or after December 31, 1998, and amend said reports if necessary to properly reflect the financial condition of the Bank as of the date of each such report. In particular, such reports shall contain an adequate allowance for loan and lease losses. Reports filed after the effective date of this ORDER shall also accurately reflect the financial condition of the Bank as of the reporting date.

   [.6]6. (a) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has an extension of credit with the Bank that has been classified Loss, either in whole or in part, and is uncollected, or to any borrower who is already obligated in any manner to the Bank on any extension of credit, including any portion thereof, that has been charged off the books of the Bank and remains uncollected. The requirements of this paragraph shall not prohibit the bank from renewing credit already extended to a borrower after full collection, in cash, of interest due from the borrower.
   (b) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower whose extension of credit is classified Substandard, either in whole or in part, and is uncollected, unless the Bank's board of directors has signed a detailed writ- {{01-31-00 p.C-4827}}ten statement giving reasons why failure to extend such credit would be detrimental to the best interests of the Bank. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.

   [.7]7. Within 30 days after the effective date of this ORDER, the Bank, to the best of its ability, using reasonable effort, shall eliminate and/or correct all technical exceptions with regard to loan documentation existing in the Bank as of March 15, 1999, as more fully set out on pages 40 to 43 of the March 15, 1999 Report of Examination.

   [.8]8. Within 60 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies and procedures to provide effective guidance and control over the Bank's lending function. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and Commissioner, as determined at subsequent examinations, and shall include, at a minimum, the following:

   (a) A provision that deviations from the written lending policies and procedures require prior approval of the board of directors of the bank;
   (b) A provision that establishes the lending limit of each loan officer;
   (c) A requirement that extensions of credit shall not be refinanced, reworked or renewed unless current financial information and documentation have been obtained;
   (d) A requirement that all loans in excess of $100,000 shall be reviewed and receive the prior approval of the board of directors;
   (e) Standards setting forth appropriate limitations on concentrations of credit;
   (f) A requirement that all loans shall have written repayment understandings;
   (g) Standards under which unsecured loans may be granted;
   (h) Guidelines under which loans are renewed or have their due dates extended:

   (i) without full collection of interest thereon;
   (ii) by acceptance of separate notes in payment of interest;
   (iii) by capitalization of interest to the balance of the note;

   (i) Limitations on the amount advanced in relation to the value of the collateral securing the credit and the documentation required by the Bank for each type of secured credit;
   (j) A provision specifically outlining the collection procedures to be taken by the Bank when borrowers fail to make timely payments; and
   (k) A provision outlining the documentation required on all secured loans.

   [.10]10. Within 10 days of the date of this ORDER, the Board shall adopt procedures to assure that loans meeting the definition of ``non accrual'', contained in the Instructions for Preparation of Reports of Condition and Income, are placed on non accrual status.

   [.11]11. Within 30 days after the effective date of this ORDER, the board of directors shall establish a loan review committee or retain a consultant to periodically review the Bank's loan portfolio and identify and categorize problem credits. The committee or consultant shall file a report with the board of directors. This report shall include the following information:

   (a) The overall quality of the loan portfolio;
   (b) The identification, by type and amount, of each problem or delinquent loan; and
   (c) The identification of all loans not in conformance with the Bank's lending policy.

   [.12]12. (a) Within 60 days after the date of this ORDER, the Bank shall prepare a plan for submission to the shareholders at their next meeting to reorganize the board of directors either by increasing the number of directors or by appointing new directors so that for so long as this ORDER is outstanding {{01-31-00 p.C-4828}}at least 50 percent of the members of the board shall be independent, outside directors as defined herein. Thereafter, the plan shall be implemented and best efforts used to reconstitute the Board as delineated in the plan.
   (b) For the purposes of this ORDER, an ``outside director'' shall be an individual:

   (i) Who shall not be employed by the Bank or its affiliates other than as a director of the Bank or an affiliate;
   (ii) Who shall not own or control more than 5 percent of the voting stock of the Bank or its holding company;
   (iii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than $100,000;
   (iv) Who shall not be related to any director, principal shareholder of the Bank or to any director or principal shareholder of any affiliate of the bank; and
   (v) Who shall be a resident of, or engage in business in, the Bank's trade area.