(This order was terminated by order of the FDIC dated 1-7-04; see ¶16,367.)
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.
[.1] Capital—Maintain Tier 1 Capital
[.2] Dividends—Dividends Restricted
[.3] Assets—Charge-off or Collection
[.4] Loan Loss Reserve—Establishment of or Increase Required
[.5] Loans—Extensions of Credit—To Borrowers with Existing Adversely
Classified Credits
[.6] Management—Management Plan Required
[.7] Loan Policy—Preparation or Revision of Policy Required
[.8] Loan Review Committee—Establish
[.9] Violations of Law—Correction of Violations Required
[.10] Technical Exceptions—Correction of Technical Exceptions Required
[.11] Budget Plan—Preparation Required
[.12] Board of Directors—Committee to Review Compliance with Cease and
Desist Order Required
[.13] Interest Rate Risk Policy—Preparation or Revision of Policy Required
[.14] Shareholders—Disclosure of Cease and Desist Order Required
In the Matter of
MCMULLEN BANK
TILDEN, TEXAS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-02-061b
The McMullen Bank, Tilden, Texas ("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), and having
waived those rights, entered into a STIPULATION AND CONSENT TO THE
ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT")
with counsel for the Federal Deposit Insurance Corporation
("FDIC") dated May 9, 2002, 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.
The FDIC considered the matter and determined that it had reason to
believe that the Bank had engaged in unsafe or unsound banking
practices and had violated laws and/or regulations. The FDIC,
therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
IT IS ORDERED, that the Bank and institution-affiliated parties of
the Bank cease
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and desist from the following unsafe or unsound banking
practices and violations of laws and/or regulations:
(a) Operating the Bank with an inadequate level of capital
protection for the kind and quality of assets held by the Bank;
(b) Operating the Bank with an excessive level of poor quality assets;
(c) Failing to provide an adequate allowance for loan and lease losses;
(d) Renewing or extending credit which is inadequately secured;
(e) Refinancing credits to borrowers in weak financial positions
without improving collateral margins or establishing structured
repayment programs;
(f) Operating the Bank with management whose policies and practices are
detrimental to the Bank and jeopardize the safety of its deposits;
(g) Operating the Bank without adequate supervision and direction by
the Bank's board of directors over the management of the Bank;
(h) Engaging in hazardous lending and/or lax collection practices;
(i) Operating the Bank in contravention of written loan policies and
procedures;
(j) Operating the Bank in violation of applicable Federal and State
laws and regulations as more fully set forth on page 25 of the Report
of Examination of the Bank as of December 31, 2001;
(k) Renewing or extending credit without adequate and appropriate
supporting documentation;
(l) Operating the Bank with inadequate earnings to fund growth, support
dividend payments and augment capital.
IT IS FURTHER ORDERED,, that the Bank shall take affirmative
action as follows:
[.1]1. (a) Within 60 days after the effective date of this ORDER, and for
so long thereafter as this ORDER is outstanding, the Bank shall
maintain Tier 1 capital equal to or greater than 8 percent of its
adjusted average total assets after establishing an adequate allowance
for loan and lease losses as required herein.
(b) If such ratio is less than 8 percent as determined at an
examination by the FDIC or the Texas State banking department
("State"), the Bank shall, within 30 days after receipt of a
written notice of the capital deficiency from the Regional Director of
the FDIC's Dallas Regional Office ("Regional Director") or the
Bank Commissioner for the State of Texas ("Commissioner"),
present to the Regional Director and the Commissioner a plan to
increase the Tier 1 capital of the Bank or to take other measures to
bring the ratio to 8 percent. After the Regional Director and
Commissioner respond to the plan, the board of directors of the Bank
shall adopt the plan, including any modifications or amendments
requested by the Regional Director and Commissioner.
Thereafter, to the extent such measures have not previously been
initiated, the Bank shall immediately initiate measures detailed in the
plan, to increase its Tier 1 capital by an amount sufficient to bring
the ratio to 8 percent within 60 days after the Regional Director and
Commissioner respond to the plan. Such increase in Tier 1 capital and
any increase in Tier 1 capital necessary to meet the ratio required by
this ORDER may be accomplished by:
(i) The sale of securities in the form of common stock; or
(ii) The direct contribution of cash subsequent to December 31, 2001 by
the director and/or shareholders of the Bank or by the Bank's holding
company; or
(iii) Receipt of an income tax refund or the capitalization subsequent
to December 31, 2001 of a bona fide tax refund certified as being
accurate by a certified public accounting firm; or
(iv) Any other method approved by the Regional Director and the
Commissioner.
(c) If all or part of the increase in Tier 1 capital required by
this ORDER is to be accomplished by the sale of new securities, the
Bank's board of directors shall adopt and implement a plan for the
sale of such additional securities. Should the implementation of the
plan involve a public distribution of the Bank's securities (including
a distribution limited only to the Bank's existing shareholders), the
Bank shall prepare offering materials fully describing the securities
being offered, including an accurate description of the financial
condition of the Bank and the circumstances giving rise to the
offering, and any other material disclosures necessary to comply with
Federal securities laws. Prior to the implementation of the plan, and
in any event, not less than 20 days prior to the dissemination of such
materials, the plan and any materials used in the sale of the
securities shall be submitted to the FDIC, Registration, Disclosure and
Securities
{{7-31-02 p.C-5459}}
Operation Unit, Washington, D.C. 20429, for review. Any
changes requested to be made in the plan or the materials by the FDIC
shall be made prior to their dissemination. If the increase in Tier 1
capital is to be provided by the sale of noncumulative perpetual
preferred stock, then all terms and conditions of the issue shall be
presented to the Regional Director for prior approval.
(d) In complying with the provisions of this ORDER and until such time
as any such public offering is terminated, the Bank shall provide to
any subscriber and/or purchaser of the Bank's securities written
notice of any planned or existing development or other change which is
materially different from the information reflected in any offering
materials used in connection with the sale of the Bank's securities.
The written notice required by this paragraph shall be furnished within
10 days after the date such material development or change was planned
or occurred, whichever is earlier, and shall be furnished to every
purchaser and/or subscriber who received or was tendered the
information contained in the Bank's original offering materials.
(e) In addition to the requirements of subparagraphs 1(a) and (b), the
Bank shall comply with the FDIC's Statement of Policy on Risk-Based
Capital found in Appendix A to Part 325 of the FDIC Rules and
Regulations, 12 C.F.R. Part 325, App. A.
(f) For the purposes of this ORDER, all terms relating to Tier 1
capital shall be calculated according to the methodology set forth in
the report of examination.
[.2]2. While this ORDER is in effect, the Bank shall neither declare
nor pay, directly or indirectly, any cash dividends to shareholders
without the prior written consent of the Regional Director and the
Commissioner.
[.3]3. (a) Within 30 days after 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 and one-half of the assets classified Doubtful
by the FDIC as a result of its examination of the Bank as of December
31, 2001. 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 Regional Director and the
Commissioner to reduce the remaining assets classified Doubtful and
Substandard as of December 31, 2001. At a minimum, the plan shall
include the following:
(i) A schedule providing quarterly goals to reduce the remaining
adversely classified assets as of December 31, 2001 to levels
representing not more than a specified percentage of Tier 1 capital
plus the allowance for loan and lease losses as reported each quarter
by the Bank in its Consolidated Reports of Condition and Income and
shall include no less than six consecutive quarterly target dates;
(ii) An explanation showing the complete rationale used by the Bank in
constructing the reduction schedule; and,
(iii) A provision requiring, at a minimum, quarterly reviews by
the Bank's board of directors whereby the extent of the Bank's
compliance with the plan is expressly addressed, with the results of
each review to be recorded in the corporate minutes of the Bank's
board of directors.
(c) Upon written notice from the Regional Director or the
Commissioner that the submitted plan is not acceptable, the Bank shall,
within 30 days after receipt of such notice, submit amendments to the
plan to the Regional Director and the Commissioner, including any
modifications or amendments requested by the Regional Director or
Commissioner. Upon written notice that the plan is accepted, it shall
be adopted by the Bank's board of directors. The Bank shall then
immediately initiate measures detailed in the plan to the extent such
measures have not been initiated.
(d) For purposes of the plan, the reduction of the level of adversely
classified assets as of December 31, 2001, to a specified percentage of
Tier 1 capital plus the allowance for loan and lease losses may be
accomplished by:
(i) Charge-off;
(ii) Collection;
(iii) Sufficient improvement in the quality of adversely classified
assets so as to warrant removing any adverse classification, as
determined by the FDIC; or
(iv) Increase of Tier 1 capital.
(e) While this ORDER is in effect, the
{{7-31-02 p.C-5460}}
Bank shall eliminate from
its books, by charge-off or collection, all assets or portions of
assets classified Loss as determined at any future examination
conducted by the FDIC or the State.
[.4]4. (a) Within 30 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
Bank's board of directors 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 Bank's board of directors' 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 30 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, 2001, 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.
[.5]5. (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 Doubtful and/or
Substandard, either in whole or in part, and is uncollected, unless the
Bank's board of directors has signed a detailed written 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
Bank's board of directors' meeting.
[.6]6. (a) Within 90 days after the effective date of this ORDER, the Bank
shall develop a plan to improve Bank management. The plan may be
developed by an independent committee of the Bank's board of directors
or an outside consultant reporting to the Bank's board of directors.
If the committee is composed of members of the Bank's board of
directors, a majority of the committee shall consist of directors that
are not officers at the Bank or family members of Bank officers. At a
minimum, the plan shall include the following:
(i) A review of the current and past performance of Bank
management and senior lending officials;
(ii) An analysis of current key position descriptions at the Bank; and
(iii) An analysis of the overall staffing requirements of the Bank.
The plan may include the addition, dismissal, or reassignment of
Bank officers and staff. If appropriate, the plan shall provide for
management succession, thus ensuring the continuity of a satisfactory
management team at the Bank.
(b) Each Bank officer 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 an
appropriate level of lending, collections, and loan supervision
experience for the type and quality of the Bank's loan portfolio. The
qualifications of Bank management personnel shall be evaluated on their
ability to:
(i) Comply with the requirements of this ORDER;
(ii) Operate the Bank in a safe and sound manner;
(iii) Comply with all applicable laws and regulations; and
(iv) Restore all aspects of the Bank to a safe and sound condition,
including as appropriate, asset quality, capital adequacy,
{{7-31-02 p.C-5461}}
earnings, management effectiveness, and liquidity.
(c) A copy of the plan shall be submitted to the Regional Director
and the Commissioner for review and comment. Once comments have been
received from the Regional Director and the Commissioner, the Bank
shall immediately initiate actions to implement the plan as amended or
modified by the Regional Director and the Commissioner.
(d) While this ORDER is in effect, the Bank shall notify the Regional
Director and the Commissioner in writing of any changes in Bank
management. The notification must include the name(s) and background(s)
of any replacement personnel and must be provided to the Regional
Director and the Commissioner prior to the individual(s) assuming the
position(s) with the Bank.
[.7]7. 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
the 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 Bank's board of
directors;
(b) A requirement that all loans in excess of $150,000 shall be
reviewed and receive the prior approval of the Bank's board of
directors;
(c) A requirement that all loans shall have written repayment
understandings;
(d) Guidelines under which loans are renewed or have their due dates
extended.
[.8]8. (a) Within 60 days after the effective date of this ORDER, the
Bank's board of directors shall establish a loan review committee to
periodically review the Bank's loan portfolio and identify and
categorize problem credits. The committee shall file a report with the
Bank's board of directors at each board meeting. This report shall
include the following information:
(i) The overall quality of the loan portfolio;
(ii) The identification, by type and amount, of each problem or
delinquent loan;
(iii) The identification of all loans not in conformance with the
Bank's lending policy; and
(iv) The identification of all loans to officers, directors, principal
shareholders or their related interests.
(b) At least 50 percent of the members of the loan review
committee shall be directors not employed in any capacity by the Bank
other than as a director.
[.9]9. Within 60 days after the effective date of this ORDER, the Bank,
consistent with sound banking practices, shall eliminate and/or correct
all violations of laws and/or regulations existing in the Bank as of
December 31, 2001, as more fully set forth on page 25 of the December
31, 2001 Report of Examination. In addition, the Bank shall ensure its
future compliance with all applicable laws and regulations.
[.10]10. Within 60 days after the effective date of this ORDER, the
Bank shall endeavor to eliminate and/or correct all technical
exceptions with regard to loan documentation existing in the Bank as of
December 31, 2001, as more fully set out on pages 52 through 56 of the
December 31, 2001 Report of Examination.
[.11]11. Within 90 days after the effective date of this ORDER, the Bank's
board of directors shall develop a projected budget for the Bank
encompassing at least twelve consecutive quarters. The Bank's board of
directors shall periodically review all general ledger items to
determine methods for expense reduction and/or income enhancement. The
Bank's board of directors' consideration of these areas shall be
recorded in the official minutes of the Bank's board of directors
meetings.
[.12]12. Within 60 days after the effective date of this ORDER, the Bank's
board of directors shall establish a subcommittee of the board of
directors of the Bank charged with the responsibility of ensuring that
the Bank complies with the provisions of this ORDER. At least 50
percent of the members of such subcommittee shall be directors not
employed in any capacity by the Bank other than as a director. The
committee shall report monthly to the full board of directors of the
Bank and a copy of the report and any discussion relating to the report
or the ORDER
{{7-31-02 p.C-5462}}
shall be noted in the minutes of the Bank's board of
directors' meetings. The establishment of this subcommittee shall not
diminish the responsibility or liability of the entire board of
directors of the Bank to ensure compliance with the provisions of this
ORDER.
[.13]13. Within 60 days after the effective date of the ORDER, the Bank
shall develop, adopt, and implement an interest rate risk policy and
procedures that shall include, at a minimum:
(a) Measures designed to control the nature and amount of interest
rate risk the Bank takes including those that specify risk limits and
define lines of responsibilities and authority for managing risk;
(b) A system for identifying and measuring interest rate risk;
(c) A system for monitoring and reporting risk exposures; and
(d) A system of internal controls, review, and audit to ensure the
integrity of the overall risk management process.
[.14]14. After 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 also
(2) in conjunction with its notice or proxy statement preceding the
Bank's next shareholder meeting. The description shall fully describe
the ORDER in all material respects. The description and any
accompanying communication, statement, or notice shall be sent to the
FDIC, Registration, Disclosure and Securities Operations Unit,
Washington, D.C. 20429, for review at least 20 days prior to
dissemination to shareholders. Any changes requested by the FDIC shall
be made prior to dissemination of the description, communication,
notice, or statement.
15. Within 30 days after the end of the first calendar quarter
following the effective date of this ORDER, and within 30 days after
the end of each successive calendar quarter, the Bank shall furnish
written progress reports to the Regional Director and the Commissioner
detailing the form and manner of any 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 and the Commissioner have
released the Bank in writing from making additional reports.
16. The effective date of this ORDER shall be 10 days after the date of
its issuance. This ORDER shall be binding upon the Bank and all
institution-affiliated parties of the Bank. The provisions of this
ORDER shall remain effective and enforceable except to the extent that,
and until such time as, any provision of this ORDER shall have been
modified, terminated, suspended, or set aside by the FDIC. Pursuant to
delegated authority.
Dated at Dallas, Texas, this 17th day of May, 2002.
