(This order was terminated by order of the FDIC dated 8-14-03; see ¶16,349.)
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] Management—Qualifications Specified
[.2] Management—Management Report Required
[.3] Capital—Maintain Tier 1 Capital
[.4] Loan Loss Reserve—Establishment of or Increase Required
[.5] Profit Plan—Preparation of Plan Required
[.6] Assets—Charge-off or Collection
[.7] Loans—Extensions of Credit—To Borrowers with Existing Adversely
Classified Credits
[.8] Loan Policy—Preparation or Revision of Policy Required
[.9] Loan Review and Grading System—Establishment of Required
{{10-31-03 p.C-5530}}
[.10] Violations of Law—Correction of Violations Required
[.11] Funds Management and Liquidity—Preparation or Revision of Funds
Management Policy Required
[.12] Asset/Liability Management—Preparation or Revision of Asset/Liability
Management Policy Required
[.13] Investments and Investment Policy—Investment Policy, Preparation or
Revision Required
[.14] Reports of Condition and Income—Amendment Required
[.15] Dividends—Dividends Restricted
[.16] Audit—Internal Audit—Minimum Procedures Specified
[.17] Shareholders—Disclosure of Cease and Desist Order Required
In the Matter of
THE PEOPLES STATE BANK
HODGENVILLE, KENTUCKY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-02-077b
The Peoples State Bank, Hodgenville, Kentucky
("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 and contraventions of policy
alleged to have been committed by the Bank and of its right to a
hearing on the alleged charges under section 8(b)(1) of the Federal
Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b)(1), 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 July 17, 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, and contraventions of policy, 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 committed violations of law 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 directors, officers,
employees, agents, and other 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:
(a) engaging in hazardous lending and lax collection practices;
(b) operating with inadequate capital in relation to the kind and
quality of assets held by the Bank;
(c) operating with a large volume of poor quality loans;
(d) operating with an inadequate loan valuation reserve;
(e) operating with inadequate provisions for liquidity in light of the
Bank's asset and liability mix;
(f) operating with inadequate provisions for interest rate risk
measurement and monitoring;
(g) operating in such a manner as to produce low earnings;
(h) operating in violation of Part 323 of the FDIC Rules and
Regulations, 12 C.F.R. §323.3; of Part 326 of the FDIC Rules and
Regulations, 12 C.F.R. §326.8; of Part 337 of the FDIC Rules and
Regulations, 12 C.F.R. §337.3(c); of Section 39 of the Act, 12
U.S.C. §1831p-1, and in contravention of Appendix A to Part 364 of
the FDIC Rules and Regulations, 12 C.F.R. §364; in violation of
Sections 287.280 and 287.065 of the Kentucky Revised Statutes; in
contravention of the Interagency Policy Statement on the Allowance for
Loan and Lease Losses, FDIC Financial Institutions Letter 89-93
(12/21/1993); the Joint Agency Policy Statement on Interest Rate Risk,
61 Fed. Reg. 33169 (6/26/1996); and the Interagency Policy Statement
{{10-31-02 p.C-5531}}
on the Internal Audit Function and its Outsourcing, FDIC Financial
Institutions Letter 133-97 (12/22/1997).
(i) operating with management whose policies and practices are
detrimental to the Bank and jeopardize the safety of its deposits; and
(j) operating with a board of directors which has failed to provide
adequate supervision over and direction to the active management of the
Bank.
IT IS FURTHER ORDERED that the Bank, its institution-affiliated
parties, and its successors and assigns, take affirmative action as
follows:
[.1]1. (a) During the life of this ORDER, the Bank shall have management
qualified to restore the Bank to a sound condition. Such management
shall include a chief executive officer and an experienced senior
lending officer responsible for supervising the Bank's overall lending
function.
(b) Management shall be assessed on its ability to:
(i) Comply in all material respects with the requirements of this
ORDER;
(ii) Improve and thereafter maintain the Bank in a safe and sound
condition, including asset quality, capital adequacy, liquidity
adequacy, earnings adequacy, and sensitivity to market risk; and
(iii) Comply in all material respects with all applicable State and
Federal laws and regulations, and all FDIC and Federal Financial
Institutions Examination Council ("FFIEC") policy statements;
(c) (i) During the life of this ORDER, the Bank shall notify the
Regional Director of the Chicago Regional Office ("Regional
Director") and the Commissioner of the Kentucky Department of
Financial Institutions ("Commissioner"), in writing, of any
resignations and/or terminations of any members of its board of
directors and/or any of its senior executive officer(s) within 15 days
of the event; and
(ii) The Bank shall comply with Section 32 of the Act, 12 U.S.C.
§1831i, and shall notify the Regional Director and the Commissioner,
in writing, at least 30 days prior to an individual assuming a new
position, or of any additions to its board of directors and senior
executive officers.
(d) Within 30 days from the effective date of this ORDER, the
board of directors shall establish a committee of the board of
directors with the responsibility to ensure that the Bank complies with
the provisions of this ORDER. At least one half of the members of such
committee shall be independent, outside directors as defined herein.
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 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.
(e) For the purposes of this ORDER, an "outside director" shall
be an individual:
(i) Who shall not be employed, in any capacity, 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 5 percent of the Bank's equity capital and
reserves;
(iv) Who shall not be related to any directors, principal shareholders
of the Bank or affiliates of the Bank; and
(v) Who shall be a resident of, or engage in business in, the Bank's
trade area.
(f) Within twelve months of the effective date of this ORDER, each
member of the board of directors shall attend at least eight hours of
training related to the duties and responsibilities of bank directors.
This training shall be conducted by a recognized organization of
bankers or be sponsored and approved by such an organization.
[.2]2. (a) Within 90 days from the date of this ORDER, the board of
directors shall review and make a written report ("Management
Report") on the Bank's management needs in the lending area. The
Management Report shall incorporate an analysis of the Bank's
management and staffing requirements and shall, at a minimum:
(i) Identify both the number and type of positions needed to
properly supervise the Bank's lending functions, giving appropriate
consideration to the Bank's loan volume, customer base, and the number
of problem credits;
{{10-31-02 p.C-5532}}
(ii) Provide a clear and concise description of the general duties and
responsibilities for lending officers and their support staff;
(iii) Identify the skills, experience, and pay required for each
position;
(iv) Provide an evaluation of the Bank's senior management and lending
officials, indicating whether Bank officials possess the necessary
lending and collection experience and qualifications required to
perform present and anticipated duties adequately;
(v) Establish a plan to recruit, hire, and/or replace personnel based
on ability and experience;
(vi) Establish a plan providing for periodic evaluation of each
individual's job performance; and
(vii) Provide for periodic review of Bank's management and updating of
lending policies and procedures.
(b) The board of directors shall obtain the services of an outside
consultant(s), acceptable to the Regional Director and the
Commissioner, who is knowledgeable in the area of lending, collections,
and personnel evaluation to assist the board of directors in
reviewing the Bank's management needs and preparing the Management
Report. The acceptability of the consultant(s) shall be based on the
consultant's ability to advise the Bank in each of the areas
identified in Paragraph 2(a).
(c) Within 120 days of the effective date of this ORDER, the board of
directors, with the assistance of the outside consultant(s), shall
prepare a written plan of implementation ("Plan") addressing the
findings of the Management Report. The Plan shall specify the actions
to be taken by the board of directors and the time frames for each
action.
(d) Within 120 days of the effective date of this ORDER, the board of
directors shall prepare a written report ("Written Report") which
shall (1) contain a recitation identifying the recommendations made by
the outside consultant(s), which have been incorporated in the
Management Report and Plan, (2) a recitation identifying the
recommendations made by the outside consultant(s), which were not
incorporated in the Management Report and Plan and the reasons for not
including such recommendations, and (3) a copy of any report(s)
prepared by the outside consultant(s).
(e) A copy of the Management Report, Plan, and Written Report shall be
submitted to the Regional Director and the Commissioner for review and
comment. Within 30 days from receipt of any comment, and after
consideration of such comment, the board of directors shall approve the
Management Report and Plan of implementation which approval shall be
recorded in the minutes of the meeting of the board of directors. It
shall remain the responsibility of the board to fully implement the
plan within the specified time frames. In the event the Plan, or any
portion thereof, is not implemented, the board shall immediately advise
the Regional Director and the Commissioner, in writing, of specific
reasons for deviating from the Plan.
[.3]3. (a) Within 90 days from the effective date of this ORDER, the Bank
shall increase its Tier I capital equal to or greater than eight
percent (8%) of its adjusted total assets as defined by Part 325 of
the FDIC Rules and Regulations ("Part 325"). Thereafter, during
the life of this ORDER, the Bank shall maintain Tier I capital equal to
or greater than eight percent (8%) of the Bank's adjusted Part 325
total assets.
(b) Any increase in Tier I capital necessary to meet the requirements
of Paragraph 3(a) of this ORDER may be accomplished by the following:
(i) The sale of new securities in the form of common stock; or
(ii) The direct contribution of cash by the directors, shareholders, or
parent Bank holding company of the Bank; or
(iii) Any other method acceptable to the FDIC.
(c) If all or part of the increase in Tier I capital required by
Paragraph 3(a) of this ORDER is accomplished by the sale of new
securities, the board of directors of the Bank shall adopt and
implement a plan for the sale of such additional securities, including
the voting of any shares owned or proxies held or controlled by them in
favor of the plan. 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 the Federal
securities laws. Prior to the implementation
{{10-31-02 p.C-5533}}
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, Accounting & Securities
Unit, 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429, for
review. Any changes requested to be made in the plan or materials by
the FDIC shall be made prior to their dissemination. If the Regional
Director allows any part of the increase in Tier I capital to be
provided by the sale of noncumulative perpetual preferred stock, then
all terms and conditions of the issue, including but not limited to,
those terms and conditions relative to the interest rate and any
convertability factor, shall be presented to the Regional Director for
prior approval.
(d) In complying with the provisions of Paragraph 3 of this ORDER, 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 changes which are materially different from the information
reflected in any offering materials used in connection with the sale of
Bank securities. The written notice required by this paragraph shall be
furnished within 10 days from the date such material development or
change was planned or occurred, whichever is earlier, and shall be
furnished to every subscriber and/or purchaser of the Bank's
securities who received or was tendered the information contained in
the Bank's original offering materials.
(e) For purposes of this ORDER, the terms "Tier I capital", and
"Part 325 total assets" shall have the meanings ascribed to them
in Part 325 of the FDIC's Rules and Regulations, respectively
subsections 325.2(t), and 325.2(v), 12 C.F.R. §§ 325.2(t) and (v).
The "Capital Calculations" schedule on page 61 of the Report of
Examination provides the method for determining the ratio of Tier I
capital to adjusted Part 325 total assets as required by this ORDER.
(f) The Bank shall not lend funds directly or indirectly, whether
secured or unsecured, to any purchaser of Bank stock or to any investor
by any other means for any portion of any increase in Tier I capital
required herein.
[.4]4. (a) Within 30 days from the effective date of this Order, the Bank
shall establish and shall thereafter maintain, through charges to
current operating income, an adequate valuation reserve for loan and
lease losses. In determining the adequacy of the valuation reserve for
loan and lease losses, the board of directors of the Bank shall at a
minimum consider the following:
(i) The prevailing instructions contained in the Federal
Financial Institutions Examination Council booklet entitled
"Instructions-Consolidated Reports of Conditions and Income";
(ii) The volume and mix of the existing loan portfolio, including the
volume and severity of nonperforming loans and adversely classified
credits, as well as an analysis of net charge-offs experienced on
previously adversely classified loans;
(iii) The extent to which loan renewals and extensions are used to
maintain loans on a current basis and the degree of risk associated
with such loans;
(iv) The trend in loan growth, including any rapid increase in loan
volume within a relatively short time period;
(v) The general and local economic conditions affecting the
collectibility of the Bank's loans;
(vi) The Bank's previous loan loss experience by loan type, including
the trend of net charge-offs as a percent of average loans over the
past several years;
(vii) The off balance sheet credit risks; and
(viii) The other factors appropriate in determining future valuation
reserves.
(b) Prior to the submission of any Report of Condition or Report
of Income, the board of directors of the Bank shall review the adequacy
of the Bank's valuation reserve for loan and lease losses. The minutes
of the board meetings at which each review is undertaken shall indicate
the results of the review, the amount of any increase to the reserve,
and the basis for the amount of the valuation reserve. The criteria for
the review shall be as set forth in Paragraph 4(a).
(c) Notwithstanding the provisions of Paragraph 4(a) and 4(b) above,
the Bank shall achieve, within 30 days of the effective date of this
ORDER, a valuation reserve for loan and lease losses, after charge-off
of loans classified "Loss" as required in Paragraph 6(a) below,
of not less than $1,820,000, and shall thereafter maintain, through
charges to
{{10-31-02 p.C-5534}}
current operating income, an adequate valuation reserve for
loan and lease losses.
(d) In the event that the Regional Director and/or the Commissioner
determine, at subsequent examinations and/or visitations, that the
Bank's valuation reserve for loan and lease losses is inadequate, the
Bank shall amend its Consolidated Reports of Condition and Income in
accordance with Paragraph 14 of this ORDER.
(e) The requirements of Paragraph 4(c) above are not to be construed as
a standard for future operations.
[.5]5. (a) Within 60 days from the effective date of this ORDER, and within
the first 30 days of each calendar year thereafter, the board of
directors shall develop a written profit plan consisting of goals and
strategies for improving the earnings of the Bank for each calendar
year. The 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 on not less
than a quarterly basis; and
(iv) A description of the operating assumptions that form the basis
for, and adequately support, major projected income and expense
components.
(b) Such written profit plan and any subsequent modification
thereto shall be submitted to the Regional Director and the
Commissioner for review and comment. No more than 30 days after the
receipt of any comment from the Regional Director and/or the
Commissioner, the board of directors shall approve the written profit
plan which approval shall be recorded in the minutes of the board of
directors. Thereafter, the Bank, its directors, officers, and employees
shall follow the written profit plan and/or any subsequent
modification.
[.6]6. (a) Within 10 days from the effective date of this ORDER, the Bank
shall eliminate from its books, by charge-off or collection, all assets
classified "Loss" as of February 19, 2002, that have not been
previously collected or charged-off. Reduction of these assets through
proceeds of other loans made by the Bank is not considered collection
for the purpose of this paragraph.
(b) Within 10 days from the effective date of this ORDER, the Bank
shall establish and thereafter maintain an adequate reserve for
contingent liabilities and charge to the reserve all contingent
liabilities classified "Loss" of not less than $47,279.00 as of
February 19, 2002.
(c) Within 60 days from the effective date of this ORDER, the Bank
shall formulate and submit to the Regional Director and the
Commissioner for review and approval a written plan of action directed
at lessening the Bank's risk position in each line of credit or other
asset which was classified "Substandard" or "Doubtful" as
of February 19, 2002, and which aggregated $100,000 or more. Such plan
shall include, but not be limited to, the following:
(i) Target dollar levels to which the Bank will reduce each line
of credit or other asset within three months, six months, and twelve
months from the effective date of this ORDER; and
(ii) Provisions for the submission of monthly written progress reports
under this Paragraph 6 to the Bank's board of directors for review and
recordation in the board minutes.
(d) Within 90 days of the effective date of this ORDER, the bank
shall formulate and implement a written plan of action directed at
lessening the Bank's risk position in each line of credit or other
asset subject to Special Mention as of February 19, 2002. The plan
shall include an action plan for obtaining current financial
information and collateral information for each line of credit.
(e) As used in Paragraph 6, the word "reduce" means (1) to
collect, (2) to charge-off, or (3) to sufficiently improve the quality
of assets adversely classified to warrant removing any adverse
classification, as determined by the FDIC.
[.7]7. (a) Beginning with the effective date of this ORDER, the Bank shall
not extend, directly or indirectly, any additional credit to, or for
the benefit of, any borrower who has any loan or other extension of
credit with the Bank that has been charged off or classified, in whole
or in part, "Loss" or "Doubtful" and is uncollected. The
requirements of this paragraph shall not prohibit the Bank from
renewing (after collection in
{{10-31-02 p.C-5535}}
cash of interest due from the borrower)
any credit already extended to any borrower.
(b) Beginning with the effective date of this ORDER, the Bank shall not
make any further extensions of credit, directly or indirectly, to any
borrower whose loans are adversely classified "Substandard" as of
February 19, 2002, without prior approval by the Bank's board of
directors after the board's affirmative determination, as reflected in
the minutes of the meeting, that the extension of credit is in full
compliance with the Bank's loan policy, that the extension of credit
is necessary to protect the Bank's interest or is adequately secured,
that credit analysis has determined the customer to be creditworthy,
and that all necessary loan documentation is on file, including current
financial and cash flow information and satisfactory appraisal, title,
and lien documents.
(c) Beginning with the effective date of this ORDER, the Bank shall not
renew any loan without the full collection of interest due. The
issuance of separate notes to the borrowing customer or a third party,
the proceeds of which pay interest due, shall not satisfy the
requirements of this paragraph unless these separate notes receive
prior board approval in the same manner as outlined in Paragraph 7(b).
(d) This paragraph shall not prohibit the bank from extending funds
pursuant to a valid pre-existing loan commitment or unfunded letter of
credit to any borrower whose other loans are adversely classified as of
February 19, 2002, provided all necessary loan documentation is on file
for such borrower, including current financial and cash flow
information and satisfactory appraisal, title, and lien documents.
(e) If any borrower, whose loans are adversely classified as of
February 19, 2002, has a pre-existing loan commitment or unfunded
letter of credit with the bank, and such commitment or letter of credit
expires, it shall not be renewed or extended unless the bank complies
with the provisions of Paragraph 7(a) or (b), respectively, as
appropriate.
[.8]8. (a) Within 60 days from the effective date of this ORDER, the Bank
shall review its written loan policy and make whatever changes may be
necessary to provide for the safe and sound administration of all
aspects of the lending function.
(b) The Bank shall ensure, at a minimum, that the policy shall:
(i) Clearly define each individual loan officer's lending limit;
(ii) Identify the responsibility of the board of directors, or its
designated committee, in reviewing, ratifying, or approving loans;
(iii) Provide guidelines for the collection and maintenance,
prior to the disbursement of loan proceeds or the renewal of existing
loans, of proper and adequate loan documentation, including, but not
necessarily limited to, documents necessary to perfect the Bank's lien
position, evaluate its lien priority, and provide a supportable
valuation for all collateral pledged;
(iv) Provide guidelines for the maintenance and review of complete and
current credit files on each borrower, including, but not necessarily
limited to, current financial information that is adequate to support
the outstanding indebtedness of each borrower, which financial
information may include detailed balance sheets, profit and loss
statements, complete copies of recent tax returns, cash flow
projections, and recent credit reports;
(v) Provide guidelines for the identification of primary and secondary
sources of repayment for each extension of credit;
(vi) Require the establishment of, and adherence to, realistic
amortization programs;
(vii) Identify guidelines that establish criteria for granting renewals
and extensions of loans, including the required use of written
extension agreements; quarterly management reports that indicate which
loans have been extended, the length of the extension, whether interest
was paid current, and the loan officer responsible for approving the
extension; and an annual loan extension report which shall be presented
to the Bank's board of directors, or its designated committee, for
review and documentation in the minutes;
(viii) Limit the amount advanced in relation to the value of the
collateral;
(ix) Require collateral valuations performed by an independent party or
supported by purchase invoices for each type of secured loan;
(x) Provide guidelines for obtaining and reviewing real estate
appraisals, as well as ordering reappraisals when needed;
{{10-31-02 p.C-5536}}
(xi) Provide guidelines for appropriate and adequate collection
procedures including, but not limited to, actions to be taken against
borrowers who fail to make timely payments;
(xii) Identify guidelines addressing the Bank's loan review and
grading system ("Watch List");
(xiii) Provide guidelines addressing the Bank's review of the
allowance for loan and lease losses;
(xiv) Require prior approval of loans to directors, officers, and
principal shareholders and their related interests in compliance with
applicable laws and regulations;
(xv) Require proper, adequate, written loan documentation or evidence
thereof as required by sound banking practices, and prior approval of
the Bank's board of directors for any deviation from the loan policy
before disbursement of the loan proceeds to borrowers or before renewal
or extensions of existing loans; and
(xvi) Identify procedures for allowing exceptions to the loan policy.
(c) Evidence of the review and establishment of procedures to
ensure compliance with the loan policy shall be reduced to writing. The
policy and its implementation shall be in a form and manner acceptable
to the Regional Director and the Commissioner as determined at
subsequent examinations and/or visitations.
(d) Within 90 days from the effective date of this ORDER, the board of
directors shall develop a written plan for the making of real estate
construction loans, consisting of goals and strategies for minimizing
the inherent risks of this type of lending by controlling disbursements
and collateral margins and assuring timely completion of the projects
and timely repayment of the Bank's loans. The written real estate
construction loan plan shall include, at a minimum:
(i) Guidelines to ensure that the Bank investigates the
character, expertise, and breaches of financial standing of any person
(and any related parties) seeking a real estate construction loan from
the Bank;
(ii) Maintenance of documentation files including background
information concerning the reputation, work and credit experience for
the developers or contractors, and also obtaining draw inspection
reports, lot releases, appraisals, and insurance policies;
(iii) Require that before entering into any real estate construction
financing agreements, the Bank, builder, and property owner shall enter
into a written building loan agreement that specifies the performance
of each party during the entire course of construction and is backed by
a purchase or takeout agreement from a financially responsible
permanent lender;
(iv) Guidelines for the disbursement of loan funds appropriate to the
type of project financed, including procedures to ensure that all funds
advanced are used properly to complete construction or development of
the property serving as collateral; and
(v) Ensure that the Bank has retained sufficiently trained personnel to
monitor real estate construction loans before it extends any such
loans.
(e) Evidence of the review and establishment of procedures to
ensure compliance with the construction loan plan shall be reduced to
writing. The construction loan plan shall be submitted to the Regional
Director and Commissioner for review and comment. The implementation of
the construction loan plan shall be in a form and manner acceptable to
the Regional Director and the Commissioner as determined at subsequent
examinations and/or visitations.
(f) Beginning with the effective date of this ORDER, the Bank shall
initiate and implement a program to strengthen its credit files and
correct the technical exceptions as detailed on pages 58–60 of the
February 19, 2002, Report of Examination. In all future operations, the
Bank shall ascertain that all documents or evidence thereof, properly
completed, are obtained before credit is extended.
[.9]9. (a) Within 30 days of the effective date of this ORDER, the board
shall establish an internal loan review and grading system
("System") to periodically review the Bank's loan portfolio and
identify and categorize problem credits. At a minimum the System shall
provide for:
(i) The identification of the overall quality of the loan
portfolio;
(ii) The identification and amount of each delinquent loan;
(iii) An identification or grouping of loans that warrant the special
attention of management;
{{10-31-02 p.C-5537}}
(iv) For each loan identified, a statement of the amount and an
indication of the degree of risk that the loan will not be fully repaid
according to its terms and the reason(s) why the particular loan merits
special attention;
(v) An identification of credit and collateral documentation
exceptions;
(vi) The identification and status of each violation of law, rule, or
regulation;
(vii) An identification of loans not in conformance with the Bank's
lending policy, and exceptions to the Bank's lending policy;
(viii) An identification of insider loan transactions; and
(ix) A mechanism for reporting periodically, no less than quarterly, to
the board of directors on the status of each loan identified and the
action(s) taken by management.
(b) A copy of the reports submitted to the board, as well as
documentation of the action taken by the Bank to collect or strengthen
assets identified as problem credits, shall be kept with the minutes of
the board of directors.
(c) Within 60 days from the effective date of this ORDER the Bank's
board of directors shall establish and appoint a loan committee to
review and approve in advance all extensions of credit, and/or renewals
that when aggregated with all other extensions of credit to that
borrower, either, directly or indirectly, exceed or would exceed
$100,000. The review should include financial, income, and cash flow
information, collateral values and lien information, repayment terms,
past performance by the borrower, the purpose of the extension, and
whether the extension complies with the Bank's loan policy and
applicable laws, rules and regulations. The loan committee shall meet
at least twice monthly and shall maintain written minutes which detail
the information reviewed by the loan committee, its conclusions,
approvals, denials, recommendations, and reasons for the approval of
any credit which does not fully comply with the review requirements set
forth in this paragraph. At least monthly, the loan committee shall
submit its written minutes to the board of directors. At least one half
of the members of the loan committee shall be independent, outside
directors as defined in Paragraph 1(e) of this ORDER.
[.10]10. Within 60 days from the effective date of this ORDER, the Bank
shall eliminate and/or correct all violations of law or regulation as
well as all contraventions of policy statements that are set out on
pages 23–29 of the Report of Examination of the Bank as of February
19, 2002. In addition, the Bank shall henceforth comply with all
applicable laws, regulations, and policies.
[.11]11. Within 60 days from the effective date of this ORDER, the Bank
shall review its written liquidity and funds management policy and make
whatever changes may be necessary to include the establishment of
acceptable ranges of ratios in the following areas: volatile liability
dependence, total loans to total deposits, and temporary investments to
volatile liabilities. In addition, the liquidity policy and funds
management policy shall incorporate a funds management program which
designates acceptable levels for: volatile liabilities, including
borrowings; asset mix, including temporary funds and investments,
long-term investment securities and classes of obligors, and loans to
deposits; and rate-sensitive assets as a percent of rate-sensitive
liabilities. The policy and its implementation shall be in a form and
manner acceptable to the Regional Director and the Commissioner as
determined at subsequent examinations and/or visitations.
[.12]12. Within 60 days from the effective date of this ORDER, the Bank
shall review its written asset/liability management policy and make
whatever changes may be necessary to detail the form and manner by
which the Bank will improve its interest rate risk management system
and monitoring program, including validation of model assumptions. The
policy and its implementation shall be in a form and manner acceptable
to the Regional Director and the Commissioner as determined at
subsequent examinations and/or visitations.
[.13]13. Within 60 days from the effective date of this ORDER, the Bank
shall review its investment policy and make whatever changes may be
necessary to detail the board's investment goals, authorized
activities and instruments, internal controls and independent review,
selection of broker/dealers, risk limits and portfolio diversification,
maturity distribution, risk and performance measurements, reporting,
quality
{{10-31-02 p.C-5538}}
designations, and accounting guidelines. The policy and its
implementation shall be in a form and manner acceptable to the Regional
Director and the Commissioner as determined at subsequent examinations
and/or visitations.
[.14]14. (a) Within 30 days from the effective date of this ORDER, the Bank
shall review all Consolidated Reports of Condition and Income filled
with the FDIC on and after December 31, 2001, and shall amend and file
with the FDIC amended Consolidated Reports of Condition and Income
which accurately reflect the financial condition of the Bank as of the
date of each such Report.
(b) In addition to the above, and during the life of this ORDER, the
Bank shall file with the FDIC Consolidated Reports of Condition and
Income which accurately reflect the breaches of financial condition of
the Bank as of the reporting period. In particular, such Reports shall
include any adjustment in the Bank's books made necessary or
appropriate as a consequence of any State or FDIC examination of the
Bank during that reporting period.
[.15]15. White this ORDER is in effect, the Bank shall not declare or pay
any cash dividends on its capital stock without the prior written
approval of the Regional Director and the Commissioner.
[.16]16. Within 90 days from the effective date of this ORDER, the Bank
shall develop a written internal audit plan ("Audit Plan") that,
at a minimum, complies with the Interagency Policy Statement on the
Internal Audit Function and its Outsourcing. The Bank's board of
directors shall appoint an audit committee. At least one half of the
members of such committee shall be independent, outside directors as
that term is defined in Paragraph 1(e). The audit committee shall
report monthly to the Bank's board of directors. The audit committee
report shall be maintained as part of the minutes of the meetings of
the board of directors. Copies of the Audit Plan shall be submitted to
the Regional Director and the Commissioner. The Audit Plan and its
implementation shall be in a form and manner acceptable to the Regional
Director and Commissioner as determined at subsequent examinations
and/or visitations.
[.17]17. Following the effective date of this ORDER, the Bank shall send to
its shareholders or otherwise furnish a description of this ORDER, (i)
in conjunction with the Bank's next shareholder communication, and
also (ii) 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, Accounting & Securities Unit, 550 17th Street, N.W., Room F-6043,
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.
18. On the fifteenth day of the second month following the
effective day of this ORDER, and on the fifteenth day of every third
month thereafter, 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 further reports.
19. The provisions of this ORDER shall be binding upon the Bank, its
directors, officers, employees, agents, successors, assigns, and other
institution-affiliated parties of the Bank.
20. This ORDER shall become effective 10 days from the date of its
issuance.
21. 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: August 5, 2002
