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[¶5273] In the Matter of First State Bank, Crossett, Arkansas, Docket No. 02-069b (8-4-03).
[.1] Cease and Desist OrdersUnsafe or Unsound Banking Practices
[.2] Cease and Desist OrdersManagement Weaknesses
[.3] DirectorsResponsibilities
[.4] Capital RequirementsMaintain Tier I
[.5] LoansLoan Loss Reserve
[.6] LoansCharge-off or Collection
[.7] LoansLimit to Borrowers with Existing Adversely Classified Credit
[.8] LoansReview Program
[.9] LoansInternal Review and Grading System
[.10] DirectorsManaging Other Real Estate, Plan Needed
[.11] LoansBank Compliance Officer to Review
[.12] Reports of Condition and IncomeReport Required
[.13] DividendsPayments Restricted
[.14] ShareholdersNotice of Violation Required
[.15] ReportsWritten Progress Reports Required
In the Matter of
FIRST STATE BANK
CROSSETT, ARKANSAS
(Insured State Nonmember Bank)
DECISION AND ORDER TO CEASE AND DESIST
FDIC-02-069b
I. INTRODUCTION
This matter is before the Board of Directors ("Board") of
the Federal Deposit Insurance Corporation ("FDIC") following
Administrative Law Judge Ann Z. Cook's ("ALJ") issuance on April
25, 2003, of a Recommended Decision and Order to Cease and Desist
("Recommended Decision") against First State Bank, Crossett,
Arkansas ("Bank"). The FDIC sought the cease and desist order
pursuant to section 8(b) of the Federal Deposit Insurance Act ("FDI
Act") to halt unsafe and unsound banking practices and to compel the
Bank to implement an affirmative action plan to correct the cited
problems and deficiencies.
The Board has reviewed the record, the parties' submissions, the
Recommended Decision and the Bank's exceptions to the Recommended
Decision. The Board agrees with the ALJ's findings and conclusions
that the Bank engaged in unsafe and unsound banking practices and
adopts in full her Recommended Decision.
II. STATEMENT OF THE CASE
The Bank, a corporation existing and doing business under the laws
of the State of Arkansas, was during the pertinent time period a
federally insured nonmember bank with assets totaling approximately $35
million. On January 22, 2002, the FDIC commenced a safety and soundness
examination of the Bank's books and records as of September 30, 2001
("2002 examination"). The resulting FDIC Report of Examination
("Exam Report") revealed many operational and managerial
deficiencies stemming largely from the Bank's hazardous lending and
lax collection practices. Prior to the hearing, the Bank stipulated to
the adverse loan classifications and loan data and documentation
deficiencies cited in the Exam Report.
As a result of the problems discovered during the 2002 examination, a
Notice of Charges and of Hearing ("Notice") was issued on June
18, 2002, alleging that the Bank had engaged in unsafe and unsound
banking practices and seeking a cease and desist order to stop such
practices and to implement corrective action. Specifically, the Notice
charged that the Bank was operating with hazardous lending and lax
collection practices,
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an excessive quantity of poor-quality loans,
excessive loan losses, insufficient capital, inadequate loan valuation
reserves, negative earnings, inadequate management oversight,
management whose policies and practices were detrimental to the Bank
and jeopardized the safety of its deposits, and inadequate supervision
by its board of directors.
The Bank replied to the Notice on July 11, 2002, contesting the
allegations that it had engaged in unsafe and unsound banking
practices. The Bank also requested a private hearing in this matter but
the FDIC Executive Secretary, on September 9, 2002, denied that request
because the Bank had failed to demonstrate that a public hearing would
be contrary to the public interest as required by section 8(u)(2) of
the FDI Act, 12 U.S.C. §1818(u)(2).
Following document discovery by both parties, a three-day oral hearing
was held from November 4 through 6, 2002, in Little Rock, Arkansas.
FDIC Enforcement Counsel ("Enforcement Counsel") presented
evidence through two witnesses. The Bank, through its counsel,
presented four witnesses in support of its opposition to the proposed
cease and desist order.
Following the parties' submission of post-hearing briefs and proposed
findings of fact and conclusions of law and reply briefs, the ALJ
issued her Recommended Decision. On May 23, 2003, the Bank filed
exceptions to the Recommended Decision. The Executive Secretary closed
the record in this matter on June 12, 2003.
III. DISCUSSION
After a thorough review of the record in the proceeding, the Board
finds that the ALJ's findings of fact and conclusions of law were
correct as to the unsafe and unsound practices and resulting serious
financial condition of the Bank as of the 2002 examination. As
discussed below, the Board is not persuaded by any of the three
exceptions raised by the Bank.
First, the Bank asserts, but fails to demonstrate, that the AU in her
Recommended Decision improperly relied on stricken material. Except. at
46.11 The Bank correctly points out that the ALJ, in
response to the Bank's Motion to Strike, issued a post-hearing order
stating that she would not consider supplemental proposed findings of
fact and conclusions of law submitted by Enforcement Counsel in its
reply to the Bank's post-hearing submission because replies to
post-hearing submissions "must be strictly limited to responding"
to the opposing party's initial submission. See 12 C.F.R.
§308.37(b). The Bank asserts that the AU improperly relied on
Enforcement Counsel's supplemental findings and conclusions in
reaching her decision, but it fails to provide any concrete example.
The Bank's argument is apparently based on its view that, without
consideration of the stricken supplemental findings, the AU could not
have found sufficient evidence to recommend the Cease and Desist Order
("C&D Order").
The Board has reviewed the record of this proceeding, including the
ALJ's Recommended Decision, in light of this exception, and finds no
evidence in support of this charge. To the contrary, the Board observes
that the AU has issued a carefully reasoned and well documented
Recommended Decision with 22 detailed findings of fact, all of which
are sustained by citations to the record, and four conclusions of law
supported by legal authority. R.D. at 1116.
The Board further notes that many of the ALJ's findings and
conclusions were adopted, in some instances verbatim, from Enforcement
Counsel's initial proposed findings of fact and conclusions of law,
which having been submitted in full compliance with the ALJ's
post-hearing order and Rule 308.37 of the FDIC's Rules of Practice and
Procedure, 12 C.F.R. §308.37, are legitimately a part of the record
in this proceeding. Conversely, the ALJ's findings and conclusions
contain none of the wording proposed by Enforcement Counsel in its
stricken pleading. In any event, the ALJ, in reaching her decision, was
free to consider all of the testimonial and documentary evidence
admitted during the hearing even though some of that evidence might
have been offered in support of the stricken pleading. As there is no
evidence suggesting that the AU was improperly swayed by the stricken
pleading,
1 Citations to the record shall be as follows:
Recommended Decision "R.D. at ____"
Transcript "Tr. Vol. ____ at ____
FDIC Exhibits "FDIC Exh. ____"
Respondent's Exceptions "Except. at _____"
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the Board rejects this exception as entirely unsupported by
the record.
Second, the Bank challenges paragraph 13, the stockholder notification
provision, of the C&D Order. Except. at 67. With respect to this
issue, the Bank, rearguing a matter that was adequately addressed by
the AU in the Recommended Decision, contends that notice to the Bank's
stockholders of the fact of the C&D Order might cause additional
financial problems for the Bank. See R.D. at 89.
As noted by the ALJ, stockholder notification is an appropriate remedy
under section 8(b). 12 U.S.C. §1818(b)(6)(F). R.D. at 9. In this
case, many of the Bank's problems were attributed to inadequate
oversight by management and supervision by the Bank's board. As the
FDIC examiner-in-charge stated at the hearing, the contents of the C&D
Order provide Bank stockholders (who are responsible for electing bank
directors) with critical information necessary for them to make
informed decisions to prevent similar problems in the future. Tr. Vol.
1 at 153155.
Interestingly, even though the Bank objects to the inclusion of the
shareholder notification provision, each of its witnesses testified on
cross examination that they would want to know about the issuance of a
cease and desist order if they were shareholders (indeed, some of those
witnesses are shareholders of the Bank). Tr. Vol. 2 at 406407, Tr.
Vol 3 at 615, 655 and 719. In this case, shareholder notification is
especially important because paragraph 12 of the C&D Order restricts
dividend payments. R.D. at 9. Having considered the Bank's witnesses
claims of possible but unsubstantiated negative effects of stockholder
notification, the Board has determined that on balance notification to
the Bank's stockholders (even minority stockholders) is in the best
interests of the Bank and its depositors and, accordingly, rejects this
exception.
Finally, the Bank asserts that paragraph 4(c) of the C&D Order, which
requires that "the Bank shall achieve, within thirty days of the
effective date of this ORDER, a valuation reserve for loan and lease
losses, . . . of not less than $950,000, and shall
thereafter maintain, through charges to current operating income, an
adequate valuation reserve for loan and lease losses", should be
modified for clarity. Except. at 78. The Bank argues that because the
Bank added the required $950,000 to its loan loss reserve shortly after
the FDIC asked it to do so following the 2002 examination, paragraph
4(c) could be construed to require it to allocate an additional
$950,000 to the reserve after the C&D Order is issued. But as the ALJ
noted in her Recommended Decision, paragraph 4(e) of the C&D Order
plainly states that "[t]he requirements of [4(c)] are not to be
construed as a standard for future operations", making clear that
once the Bank achieved the $950,000 level it was required thereafter
only to maintain an "adequate" reserve. R. D. at 10 n. 10.
The Board finds that it was reasonable to include paragraph 4(c) in the
C&D Order and further finds that the C&D Order could not be fairly read
to require the Bank to add a second allocation of $950,000. Thus, the
Bank's exception concerning this provision is unpersuasive.
IV. CONCLUSION
The Board concludes that the record fully supports the issuance of
a formal cease and desist order and corrective plan and hereby adopts
and incorporates the ALJ's Recommended Decision and Order, as set
forth below.
ORDER TO CEASE AND DESIST
[.1] 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:
(a) engaging in hazardous lending and lax collection practices;
(b) operating with a large volume of poor quality loans;
(c) operating with an inadequate loan valuation reserve;
(d) operating in such a manner as to produce operating losses;
(e) operating with management whose policies and practices are
detrimental to the Bank and jeopardize the safety of its deposits; and
(f) operating with a board of directors which has failed to provide
adequate supervision over and direction to the active management of the
Bank.
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IT IS FURTHER ORDERED, that the Bank, its institution-affiliated
parties, and its successors and assigns, take affirmative action as
follows:
[.2] 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) Present management shall be assessed on its ability to:
(i) Comply 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, and earnings adequacy;
(iii) Comply with all applicable State and Federal laws and
regulations; and
(iv) Restore all aspects of the Bank to a safe and sound condition,
including asset quality, capital adequacy, earnings, management
effectiveness, liquidity, and sensitivity to market risk.
(c) (i) During the life of this ORDER, the Bank shall notify the
Regional Director of the Dallas Regional Office, Memphis Area Office
("Regional Director"), 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.
(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 two-thirds 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 ten (10%) 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 five (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.
[.3] 2. (a) Within 60 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;
(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
adequately perform present and anticipated duties;
(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
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to the FDIC, 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 90 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 90 days of the effective date of this ORDER, the board of
directors shall prepare a written report ("Written Report") which
shall:
(i) Contain a recitation identifying the recommendations made by
the outside consultant(s) that have been incorporated in the Management
Report and Plan;
(ii) 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
(iii) 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 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, 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, in writing, of specific
reasons for deviating from the Plan.
[.4] 3. (a) Within 60 days from the effective date of this ORDER, the Bank
shall have Tier I capital equal to or greater than eight (8%) percent
of the Bank's adjusted Part 325 total assets. Thereafter, during the
life of this ORDER, the Bank shall maintain Tier I capital equal to or
greater than eight (8%) percent of the Bank's adjusted Part 325 total
assets.
(b) Any increase in Tier I capital necessary to meet the ratio
required by Paragraph 3(a) of this ORDER may be accomplished by the
following:
(i) The sale of new securities in the form of common stock;
(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 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, &
Securities Unit (or, its successor unit), 550 17th Street, N.W., Room
F-6053, 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 convertibility factor, shall be presented to the Regional
Director for prior approval.
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(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'ssecurities
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, 12 C.F.R. §325.2.
The "Capital Calculations" schedule on pages 3839 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.
[.5] 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) Prevailing instructions contained in the Federal Financial
Institutions Examination Council booklet entitled
"Instructions-Consolidated Reports of Condition 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) General and local economic conditions affecting the collectibility
of the Bank's loans;
(vi) 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) Off balance sheet credit risks;
(viii) The overall risk associated with each concentration of credit
together with the degree of risk associated with each related
individual borrower; and
(ix) Any 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 5(a) below,
of not less than $950,000, and shall thereafter maintain, through
charges to current operating income, an adequate valuation reserve for
loan and lease losses.
(d) In the event that the Regional Director determines, 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 4(a).
(e) The requirements of Paragraph 4(c) above are not to be construed as
a standard for future operations.
[.6] 5. (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
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of December 31, 2001, 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 purposes of this paragraph.
(b) Within 60 days from the effective date of this ORDER, the Bank
shall formulate and submit to the Regional Director for review and
approval a written plan of action directed at reducing the Bank's risk
position in each line of credit which was classified
"Substandard" as of September 30, 2001, 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 5 to the Bank's board of directors for review and
recordation in the board minutes.
(c) As used in Paragraph 5(b), 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] 6. (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 a loan or other extension of
credit with the Bank that has been charged off or classified, in whole
or in part, "Loss" and was uncollected as of September 30, 2001.
The requirements of this paragraph shall not prohibit the Bank from
renewing (after collection in cash of interest due from the borrower)
any credit already extended to any borrower.
(b) Paragraph 6(a) shall not apply if the Bank's failure to extend
further credit to a particular borrower would be detrimental to the
best interests of the Bank. Prior to the extending of any additional
credit pursuant to this paragraph, either in the form of a renewal,
extension, or further advance of funds, such additional credit shall be
approved by a majority of the Bank's board of directors, or a
designated committee thereof, who shall certify, in writing:
(i) Why the failure of the Bank to extend such credit would be
detrimental to the best interests of the Bank;
(ii) That the Bank's position would be improved thereby; and
(iii) How the Bank's position would be improved. The signed
certification shall be made a part of the minutes of the Bank's board
or designated committee, and a copy of the signed certification shall
be retained in the borrower's credit file.
(c) Beginning with the effective date of this ORDER, the Bank shall
not make any further extension of credit to any borrower thereof whose
loans in the aggregate exceed $100,000 and are adversely classified
"Substandard" as of September 30, 2001, unless such extension has
been approved by a majority of the Bank's board of directors in
advance, and the Bank's board of directors has detailed in the written
minutes of the meeting how it has affirmatively determined all of the
following:
(i) That the extension of credit is in full compliance with the
Bank's loan policy;
(ii) That it is necessary to protect the Bank's interest or that the
extension of credit is adequately secured;
(iii) That based upon credit analysis the customer is deemed to be
creditworthy; and
(iv) That all necessary loan documentation is on file, including
current financial and cash flow information and satisfactory appraisal,
title, and lien documents.
(d) The minutes shall also include the following information about
the extension of credit:
(i) The amount adversely classified as of September 30, 2001;
(ii) The current balance;
(iii) The amount of credit requested;
(iv) A description of the collateral and its value securing the credit;
and
(v) A full description of the documentation presented to the board of
directors including the date of the borrower's most recent financial
information and the borrower's current income or cash flow data.
(e) Beginning with the effective date of
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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 the separate notes receive prior
board approval in the same manner as outlined in Paragraph 6(c).
(f) As used in this paragraph, the term "further extension of
credit" shall include renewals, extensions, and a further
advancement of funds.
[.8] 7. (a) Within 60 days from the effective date of this ORDER, the Bank
shall review and modify its written loan policy and make whatever
changes may be necessary to address the weaknesses cited in the FDIC
Report of Examination as of September 30, 2001, and provide for the
safe and sound administration of all aspects of the lending function.
The Bank shall adopt and enforce procedures designed to assure that the
Bank's loan policy is adhered to by the Bank's loan officers. The
Bank's loan policy shall require that every extension of credit which
deviates from its loan policy shall receive the prior approval of the
Bank's board of directors, and the deviation and the reason for it,
shall be documented in the minutes of the board meeting and its
implementation shall be in a form and manner acceptable to the Regional
Director as determined at subsequent examinations and/or visitations.
(b) 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 3437 of the
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] 8. (a) Within 30 days of the effective date of this ORDER, the board
shall strengthen its internal loan review and grading system
("System") 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;
(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 that 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
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board of directors. At least
two-thirds of the members of the loan committee shall be independent,
outside directors as defined in Paragraph 1(e) of this ORDER.
[.10] 9. (a) Within 90 days from the effective date of this ORDER, the board
of directors shall develop a plan for managing the Other Real Estate
("ORE") of the Bank. The written ORE plan shall include, at a
minimum:
(i) A quarterly review of the ORE portfolio by the ORE committee
to be appointed by the Bank;
(ii) Realistic and comprehensive budgets for each piece of ORE,
including projections of the Bank's cost of marketing the ORE, and the
Bank's costs of carrying the ORE on its books (e.g., upkeep, repairs,
and insurance costs);
(iii) A determination by the ORE committee for each piece of ORE that
the property is listed with a real estate broker or otherwise made
widely available for sale in an appropriate manner, and that the
proposed selling price is realistic;
(iv) Guidelines to ensure that periodic appraisals are obtained for the
ORE and that progress reports are obtained from all real estate brokers
marketing the ORE, including a projected sales time frame for each
piece of ORE;
(v) Guidelines to ensure that all taxes and insurance premiums are
timely paid;
(vi) An identification of any ORE that warrants the special attention
of management;
(vii) An identification of documentation exceptions on any ORE; and
(viii) An identification of all ORE not in conformance with the Bank's
policies, or exceptions to the Bank's ORE policy.
(b) Reports from the ORE committee shall be submitted to the board
of directors on at least a quarterly basis and a copy of such reports,
as well as documentation of the action taken by the Bank to facilitate
the timely sale of ORE, shall be made part of the minutes of the board
of directors.
[.11] 10. (a) Within 30 days of the effective date of this ORDER, the
Bank shall adopt and implement written policies and procedures to
ensure that all extensions of credit and/or renewals, including the
acquisition of any form of indirect indebtedness, in an amount in
excess of $25,000 or less than $100,000, shall be reviewed by the
Bank's Compliance Officer. The Bank's Compliance Officer shall ensure
that the loan, renewal, or acquisition complies with the Bank's loan
policies including, but not limited to, current financial statements
and current appraisals. Any exceptions to, or deviations from, the
Bank's established direct or indirect lending policies, shall be noted
in writing along with the name of the loan's originating officer. A
copy of the Compliance Officer's review shall be made a part of the
Bank's loan file. The Compliance Officer shall submit a written report
monthly to the Bank's board of directors concerning the Bank's
adherence to the loan policies, noting any exceptions to or deviations
from the loan policies established by the Bank's board of directors,
the loan officer responsible for the exception or deviation, and the
date the exception or deviation received the Bank board of director's
approval. The report shall be made a part of the minutes of the board
meeting.
(b) Evidence of the review and establishment of procedures to
ensure compliance with the loan policy shall be reduced to writing. The
procedures and their implementation shall be in a form and manner
acceptable to the Regional Director as determined at subsequent
examinations and/or visitations.
[.12] 11. (a) Within 30 days from the effective date of this ORDER, the Bank
shall review all Consolidated Reports of Condition and Income filed
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 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.
[.13] 12. While this ORDER is in effect, the Bank shall not declare or pay
any cash
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dividends on its capital stock without the prior written
approval of the Regional Director.
[.14] 13. Following the effective date of this ORDER, the Bank shall send to
its shareholders or otherwise furnish a description of this ORDER:
(a) In conjunction with the Bank's next shareholder communication.
(b) 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, Division of Supervision and Consumer Protection, Registration,
Disclosure, & Securities Unit (or its successor 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.
[.15] 14. On the fifteenth day of the second month following the effective
date of this ORDER, and on the fifteenth day of every third month
thereafter, the Bank shall furnish written progress reports to the
Regional Director 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 has released the Bank in
writing from making further reports.
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.
This ORDER shall become effective 10 days from the date of its
issuance.
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.
IT IS FURTHER ORDERED that copies of this Decision and Order to Cease
and Desist shall be served on the Bank, counsel for all parties, the
ALJ, and the Bank Commissioner for the State of Arkansas.
By Direction of the Board of Directors.
Dated at Washington, D.C., this 4th day of August, 2003.