(This order was terminated by order of the FDIC dated 12-23-03; see ¶16,363.)
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] ManagementManagement Plan Required
[.2] AssetsCharge-off or Collection
[.3] LoansExtensions of CreditTo Borrowers with Existing Adversely
Classified Credits
[.4] CapitalMaintain Tier 1 Capital
[.5] DividendsDividends Restricted
[.6] Loan Loss ReserveEstablishment of or Increase Required
[.7] Loan PolicyPreparation or Revision of Policy Required
[.8] Loan Review CommitteeEstablish
[.9] Violations of LawCorrection of Violations Required
[.10] Technical ExceptionsCorrection of Technical Exceptions Required
[.11] Board of DirectorsBudgetPreparation of Required
[.12] Strategic PlanPreparation of Required
[.13] Board of DirectorsOutside Directors Added to Board
[.14] Board of DirectorsCommittee to Review Compliance with Cease and
Desist Order Required
[.15] ShareholdersDisclosure of Cease and Desist Order Required
In the Matter of
FIRST STATE BANKT
ALHEQUAH, OKLAHOMA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-01-166b
OSBD-01-C&D-1
The First State Bank, Talhequah, Oklahoma ("Bank"), through
its board of directors, having been advised of its right to the
issuance and service of a NOTICE OF CHARGES AND OF HEARING detailing
the unsafe or unsound banking practices, and violations of law and/or
regulations, alleged to have been committed by the Bank, and of its
right to a hearing on the alleged charges under section 8(b) of the
Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b) and
section 204(B) of the Oklahoma Banking Code (the "Code"), Okla.
Stat. tit. 6, §204(B), and the provisions of the Oklahoma
Administrative Procedures Act (Okla. Stat. tit. 75, §250 et
seq.), and having waived those rights, entered into a STIPULATION
AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST
("CONSENT AGREEMENT") with counsel for the Federal Deposit
Insurance Corporation ("FDIC") and the Banking Commissioner
of the State of Oklahoma ("Commissioner") dated February 1, 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 and the Commissioner.
The FDIC and the Commissioner considered the matter and determined that
they had reason to believe that the Bank had engaged in unsafe or
unsound banking practices and had violated laws and/or regulations. The
FDIC and the Commissioner, therefore, accepted the CONSENT AGREEMENT
and issued the following:
ORDER TO CEASE AND DESIST
IT IS ORDERED, that the Bank and institution-affiliated parties of
the Bank cease and desist from the following unsafe or unsound banking
practices, violations of laws, and/or regulations:
{{2-29-04 p.C-5334}}
(a) Operating the Bank without adequate supervision and direction
by the Bank's board of directors over the management of the Bank;
(b) Operating the Bank with management whose policies and practices are
detrimental to the Bank and jeopardize the safety of its deposits;
(c) Operating the Bank without adequate written loan policies and
procedures;
(d) Operating the Bank in contravention of written loan policies and
procedures;
(e) Engaging in hazardous lending and ineffective and lax collection
practices;
(f) Operating the bank with an excessive level of adversely classified
assets;
(g) Renewing or extending credit which is inadequately secured;
(h) Refinancing credits to borrowers in weak financial positions
without improving collateral margins or establishing structured
repayment programs;
(i) Renewing or extending the due dates of loans without collection in
cash of interest due or obtaining adequate additional collateral to
secure credit advanced for the purpose of paying interest;
(j) Reviewing or extending credit without adequate and appropriate
supporting documentation;
(k) Failing to provide an adequate allowance for loan and lease losses;
(l) Failing to accurately reflect the condition of the Bank in
published statements and Consolidated Reports of Condition and Income;
(m) Operating the Bank with inadequate earnings to fund growth, support
dividend payments and augment capital;
(n) Operating the Bank without adequate loan review policies or
procedures;
(o) Operating the Bank with uncontrolled growth without regard to
capital protection; and
(p) Operating the Bank in violation of applicable Federal and State
laws and regulations as more fully set forth on pages 27-30 of the
Report of Examination of the Bank as of July 16, 2001.
IT IS FURTHER ORDERED, that the Bank shall take affirmative action
as follows:
[.1]1. Within 60 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 comprehensive review of the current and past performance of
Bank management and all 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,
particularly in regards to the lending and collection functions.
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.
A copy of the plan shall be provided to the Regional Director and the
Commissioner. 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.
[.2]2. (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 by the FDIC as a result of its examination of
the Bank as of July 16, 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
{{4-30-02 p.C-5335}}
Commissioner to reduce the remaining assets classified Substandard as
of July 16, 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 July 16, 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 July 16, 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 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.
[.3]3. (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 while 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:
(i) 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; and
(ii) All accrued and unpaid interest has been collected in full.
(c) While this ORDER is in effect, the Bank shall not renew, defer
or extend any loans or loan payments unless accrued interest is
collected in cash and 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.
[.4]4. (a) Within 30 days after the effective date of this ORDER, and for
so long thereafter as this ORDER is outstanding, the Bank shall achieve
and 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
{{4-30-02 p.C-5336}}
or the Oklahoma State Banking Department
("OSBD"), 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
Banking Commissioner for the State of Oklahoma ("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 30 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 July 16, 2001, by
the directors 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 July 16, 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, including soliciting proxies and
the voting of any shares or proxies owned 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 Federal and state
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 Operation Unit, Washington, D.C. 20429 and the OSBD, for
review. Any changes requested to be made in the plan or the materials
by the FDIC or OSBD 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 and
Commissioner 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.
[.5]5. While this ORDER is in effect, the Bank shall neither declare nor
pay, directly or indirectly, any cash dividend to shareholders without
prior written consent of the Regional Director and the Commissioner.
[.6]6. (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
{{4-30-02 p.C-5337}}
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, 2000, 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.
[.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) Standards for extending credit to out-of-territory borrowers;
(b) Standards for extending credit to Bank directors, officers,
shareholders and their related interests which take into account
applicable Federal and State laws governing such extensions of credit;
(c) A provision that deviations from the written lending policies and
procedures require prior approval of the Bank's board of directors;
(d) A requirement that extensions of credit shall not be refinanced,
reworked, or renewed unless all accrued interest is collected in cash,
and current financial information and documentation have been obtained;
(e) A requirement that all loans shall have written repayment
understandings;
(f) Standards under which unsecured loans may be granted;
(g) Scope and frequency of loan review;
(h) Guidelines under which loans are renewed or have their due dates
extended;
(i) Without full collection of interest thereon;
(ii) By acceptance of separate notes in payment of interest;
(iii) By capitalization of interest to the balance of the note;
(i) Limitations on the amount advanced in relation to the value of
the collateral securing the credit and the documentation required by
the Bank for each type of secured credit;
(j) A provision specifically outlining the collection procedures to be
taken by the Bank when borrowers fail to make timely payments;
(k) Guidelines for determining the rate of interest, terms, and limits
on all secured and unsecured loans;
(l) A provision outlining the documentation required on all loans;
(m) Board of directors responsibilities; and
(n) Criteria for reappraisals.
[.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 or
retain a consultant to periodically review the Bank's loan portfolio
and identify and categorize problem credits. The committee or
consultant shall file a report with the 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) Should a loan committee be established, at least 50 percent of
the members of the loan review committee shall be directors
{{4-30-02 p.C-5338}}
not employed in any capacity by the Bank other than as a director.
[.9]9. Within 30 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
July 16, 2001, as more fully set forth on pages 27-30 of the July 16,
2001, Report of Examination. In addition, the Bank shall ensure its
future compliance with all applicable laws and regulations.
[.10]10. Within 90 days after the effective date of this ORDER, the Bank
shall eliminate and/or correct, to the extent possible, all technical
exceptions with regard to loan documentation existing in the Bank as of
July 16, 2001, as more fully set out on pages 49-59 of the July 16,
2001, Report of Examination.
[.11]11. Within 60 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 six 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. A copy of the budget shall be provided to the Regional
Director and the Commissioner for their review and comment.
[.12]12. Within 90 days after the effective date of this ORDER, the Bank's
board of directors shall do the following:
(a) Develop, adopt, and implement a written strategic business plan
outlining the Bank's future scope of operations and direction that
shall include, at a minimum:
(i) Short-term goals to comply with the terms of this ORDER and
correct all regulatory criticisms;
(ii) An operating plan for the next 12 months in order to accomplish
short-term goals; and
(iii) Long-term goals for growth, capital maintenance, profitability,
and service to the community.
(b) Submit the plan to the Regional Director and Commissioner for
their review and comment.
(c) Within 30 days after the Regional Director and Commissioner have
issued their comments to the plan, the Bank shall adopt the plan
including any modifications requested by the Regional Director and
Commissioner. Thereafter, the Bank shall initiate the measures detailed
in the plan to the extent such measures have not been previously
initiated.
[.13]13. While this ORDER is in effect, the Bank shall formulate a plan and
document efforts to obtain additional "outside directors" to sit
on the Bank's board of directors. For the purposes of this ORDER, an
"outside director" shall be an individual:
(a) Who shall not be employed by the Bank other than as a director
of the Bank;
(b) Who shall not own or control more than 5 percent of the voting
stock of the Bank or its holding company;
(c) Who shall not be indebted to the Bank in an amount greater than
$100,000.
(d) Who shall not be related to any director or principal shareholder
of the Bank; and
(e) Who shall be a resident of, or engage in business in, the Bank's
trade area.
[.14]14. 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 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.
[.15]15. 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
{{1-31-0132 p.C-5339}}
shall be sent to the
FDIC Registration, Disclosure, and Securities Operation Unit,
Washington, D.C. 20429 and to the State, for review at least 20 days
prior to dissemination of the description, communication, notice, or
statements.
16. 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.
17. 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, and the
OSBD.
Pursuant to authority delegated to the Regional Director and the
authority of the Bank Commissioner of the Oklahoma State Banking
Department.
Dated this 1st day of February, 2002.