Exhibit 99(b)
UNITED STATES OF AMERICA
BEFORE
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C.
OHIO DIVISION OF FINANCIAL INSTITUTIONS
COLUMBUS, OHIO
--------------------------------)
Written Agreement by and among )
)
RURBAN FINANCIAL CORP. )
Defiance, Ohio )
)
THE STATE BANK AND TRUST )
COMPANY )
Defiance, Ohio ) Docket Nos. 02-015-WA/XX-XX
) 02-015-WA/XX-XX
FEDERAL RESERVE BANK )
OF CLEVELAND )
Cleveland, Ohio )
)
and )
)
OHIO DIVISION OF )
FINANCIAL INSTITUTIONS )
Columbus, Ohio )
--------------------------------)
WHEREAS, in recognition of their common goal to restore and maintain the
financial soundness of Rurban Financial Corp., Defiance, Ohio ("Rurban"), a
registered bank holding company, and its subsidiary bank. The State Bank and
Trust Company. Defiance, Ohio (the "Bank"), a state chartered bank that is a
member of the Federal Reserve System, Rurban, the Bank, the Federal Reserve Bank
of Cleveland (the "Reserve Bank"), and the Ohio Division of Financial
Institutions (The "Division") have mutually agreed to enter into this Written
Agreement (the "Agreement"); and
WHEREAS, on ________________, 2002 the boards of directors of Rurban and
the Bank, at duly constituted meetings, adopted resolutions authorizing and
directing Xxxxxx X. XxxXxxxxx, chairman of the boards of directors of Rurban and
the Bank, to enter into this Agreement on behalf of Rurban and the Bank,
respectively, and consenting to compliance by Rurban and the Bank, their
institution-affiliated parties, as defined in sections 3(u) and 8(b)(3) of the
Federal Deposit Insurance Act, as amended (the "FDI Act")(12 U.S.C. 1813(u) and
1818(b)(3)), and the Bank's regulated persons, as defined in Ohio Revised Code
section 1121.01(A), with each and every provision of this Agreement.
NOW, THEREFORE, Rurban, the Bank, the Reserve Bank, and the Division agree
as follows:
MANAGEMENT REVIEW
1. (a) Within 10 days of this Agreement, the boards of directors of
Rurban and the Bank shall jointly retain an independent consultant acceptable to
the Reserve Bank and the Division to conduct a review of all managerial and
operational functions of Rurban and the Bank (the "Review") and to prepare a
written report of findings and recommendations (the "Consultant's Report") to
the respective boards of directors. The terms of the contract with the
consultant shall require that the Review be completed within 45 days of the
retention of the independent consultant and that the Consultant's report be
submitted to the boards of directors of Rurban and the Bank within 10 days of
the completion of the Review. The Review shall, at a minimum, address, consider,
and include:
2
(i) The identification of the type and number of officer
positions needed to manage and properly supervise the
affairs of Rurban and the Bank;
(ii) the identification and establishment of Rurban's and the
Bank's boards of directors' committees that are needed to
provide guidance and oversight to Bank management;
(iii) an evaluation of each Rurban and Bank officer to determine
whether the individual possesses the ability, experience,
and other qualifications required to competently perform
present and anticipated duties, including the ability to
provide appropriate oversight of the lending function, to
adhere to established policies and procedures of Rurban and
the Bank, to restore and maintain Rurban and the Bank to a
safe and sound condition, and to comply with the
requirements of this Agreement; and
(iv) a plan to recruit, hire, or appoint additional or
replacement personnel with the requisite ability,
experience, and other qualifications required to
competently perform their assigned duties.
(b) The primary purpose of the Review shall be to aid in the
development of a management structure suitable to Rurban's and the Bank's needs
that is adequately staffed by qualified and trained personnel. At a minimum, the
qualifications of management shall be determined by its ability to: (i) restore
and maintain all aspect of Rurban the Bank to a safe and sound condition, and
(ii) comply with the requirements of this Agreement and all applicable
3
laws and regulations. Rurban and the Bank shall forward a copy of the
Consultant's Report to the Reserve Bank and the Division within 5 days of its
receipt.
(c) Within 30 days of Xxxxxx's and the Bank's receipt of the
Consultant's Report, Rurban and the Bank shall submit a written management plan
(the "Management Plan") to the Reserve Bank and the Division that fully
addresses the findings and recommendations in the Consultant's Report and
describes the specific actions that the boards of directors propose to take in
order to strengthen Xxxxxx's and the Bank's management and to improve the boards
of directors' supervision over Xxxxxx's and the Bank's officers.
(d) The Management Plan shall also provide for orderly management
succession, and, at a minimum, shall identify the individual(s) at Rurban and
the Bank who are considered to have the potential for advancement or promotion,
the area(s) in which such individual(s) may assume new duties or
responsibilities or the position(s) to which they may be promoted, and the
training to be provided such individual(s) to ensure adequate successor
management.
BOARD OVERSIGHT
2. Within 60 days of this Agreement, the board of directors of
Rurban and the Bank shall submit to the Reserve Bank and the Division a joint
written plan to strengthen board oversight of the management and operations of
the Bank. The plan shall, at a minimum, address, consider, and include:
(a) The actions that the boards of directors will take
to improve Xxxxxx's and the Bank's condition and
maintain effective control over and supervision
4
of the organization's senior management and major operations and activities,
including, at a minimum:
(i) The credit risk management program, including loan
underwriting, documentation, grading, and administration;
(ii) operational risk, including an independent and effective
audit function;
(iii) internal control systems and recordkeeping procedures:
(iv) training programs for the boards of directors, management,
and staff;
(v) profitability and the budget process; and
(vi) compliance programs;
(b) the responsibility of the boards of directors to monitor
management's adherence to approved policies and procedures, and
applicable laws and regulations;
(c) a description of the detailed information to be included
in the periodic reports that will be reviewed by the boards of
directors in their oversight of the operations and management of
the organization, including information sufficient to assess
management's compliance with applicable written plans, policies,
procedures, and programs; and
(d) the deficiencies related to the boards of directors'
oversight of management noted in the report of the examination of
Rurban and the Bank conducted by the Reserve Bank and the
Division, dated March 11, 2002 (the "Report of Examination").
5
LOAN POLICIES AND PROCEDURES
3. Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank and the Division acceptable written loan policies and procedures
that address the deficiencies noted in the Report of Examination. The policies
and procedures shall,at a minimum, address, consider, and include:
(a) Underwriting standards that:
(i) require borrowers to document a clear source of repayment
and ability to service their debt;
(ii) emphasize the importance of cash flow analysis rather
than collateral-based lending and ensure that financial
statements, tax returns, and other financial data
indicating the borrower's capacity to repay the loan are
sufficiently current;
(iii) accurately reflect the Bank's current loan products and
market strategies;
(b) procedures for renewing, extending, or modifying existing
loans, including documentation of the bases for each renewal,
extension or modification, and limitations on capitalizing
interest;
(c) standards for lease financing;
(d) a description of the Bank's market area and limitations on
out-of-territory lending;
(e) guidelines for extending and documenting credit to
Rurban's and the Bank's institution-affiliated parties and
regulated persons, their related interests and immediate family
members, and to affiliates of the Bank to
6
ensure compliance with Regulation O of the Board of Governors
(12 C.F.R. Part 215) and sections 23A and 23B of the Federal
Reserve Act (12 U.S.C. 371c and 371c-1), and sections
1109.23,1109.54, and 1109.55 of the Ohio Revised Code and
section 1301:1-3-04 of the Ohio Administrative Code;
(f) guidelines for real estate appraisals that are consistent with
the requirements of Subpart G of Regulation Y of the Board of
Governors (12 C.F.R. Part 225, Subpart G), made applicable to
state member banks by section 208.50 of Regulation H of the
Board of Governors (12 C.F.R. 208.50) and the Board of
Governors' Guidelines for Real Estate Appraisal Policies and
Review Procedures; and
(g) controls to ensure uniform adherence to all loan policies and
procedures.
LOAN DOCUMENTATION
4. Within 60 days of this Agreement, the Bank shall take all steps
necessary to correct all documentation and credit information deficiencies and
loan policy exceptions listed in the Report of Examination, including obtaining
accurate and current financial statements and appraisals. During the term of
this Agreement, the Bank shall maintain current and complete documentation on
all loans consistent with its approved loan policies. In all cases where the
Bank is unable to obtain needed documentation or credit information, it shall
document the actions taken to secure the information, the reason the information
could not be obtained, and shall maintain such documentation in the appropriate
file for subsequent supervisory review.
7
ACCRUAL PROCEDURES
5. (a) The Bank shall immediately take all steps necessary, consistent
with generally accepted accounting principles, to reverse any previously accrued
and uncollected interest on any loans that have been placed in non-accrual
status, as provided in the Instructions for the Preparation of Reports of
Condition and Income.
(b) The Bank shall not accrue interest on any asset that is or becomes
90 days or more past due as to principal or interest, unless such asset is
"well-secured" and "in the process of collection" as those terms are used in the
Instructions for the Preparation of Reports of Condition and Income.
(c) The Bank shall ensure timely recognition of losses on repossessed
assets, in accordance with the Instructions for the Preparation of Reports of
Condition and Income.
LOAN REVIEW
6. Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank and the Division an acceptable written loan review program. This
program shall be designed to identify, categorize, and monitor problem credits
and to assess the overall quality of the Bank's loan portfolio, and shall, at a
minimum, address, consider, and include:
(a) The timely identification and classification of problem
credits;
(b) for each loan identified as a watch list loan, a written
statement, maintained in the credit file, describing the
reasons why such loan merits special attention and a proposed
asset improvement plan;
(c) the development of an adequate internal loan review report;
and
8
(d) periodic reporting by the loan review officer to the board of
directors of the status of the loan reviews and the action(s)
taken by management to improve the Bank's position on each
loan adversely graded.
ASSET IMPROVEMENT
7. (a) Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank and the Division an acceptable written plan designed to improve the
Bank's position through repayment, amortization, liquidation, additional
collateral or other means on each loan or other asset in excess of $250,000 that
was past due as to principal or interest more than 90 days as of the date of
this Agreement, is on the Bank's watch list, or that was adversely classified
or listed as special mention in the Report of Examination.
(b) Within 30 days of the date that any additional loan or other
asset in excess of $250,000 becomes past due as to principal and interest for
more than 90 days, is adversely classified internally by the Bank, or is
adversely classified or listed for special mention in any subsequent report of
examination or visitation of the Bank, the Bank shall submit to the Reserve Bank
and the Division an acceptable written plan to improve the Bank's position on
such loan or asset.
(c) The plan for each loan or other asset shall be formally
approved by the Bank's loan committee and shall, at a minimum, include:
(i) The current status of the loan or other asset,
including book and nonbook carrying value, and the
nature and value of supporting collateral;
9
(ii) proposed actions to improve, reduce, or eliminate the
loan or other asset, time frames for such actions and
projected balance owing and value of any anticipated
additional collateral; and
(iii) where appropriate, the borrower's acknowledgement of
and response to the plan.
(d) Within 30 days of the end of the next calendar quarter following
the due date for submission of the initial asset improvement plans, and within
30 days of the end of each calendar quarter thereafter, the Bank shall submit a
written progress report to the Reserve Bank and the Division to update the asset
improvement plan, which shall include, at a minimum, the carrying value of the
loan or other asset, changes in the nature and value of supporting collateral,
and a copy of the Bank's current internal watch list.
ALLOWANCE FOR LOAN AND LEASE LOSSES
8. The Bank shall maintain, through charges to current operating
income, an adequate valuation reserve for loan losses. The adequacy of the
reserve shall be determined in light of the volume of criticized loans the
current level of past due and non-performing loans, past loan loss experience,
evaluation of the probable losses in the Bank's loan portfolio, including the
potential for the existence of unidentified losses in loans adversely
classified, the imprecision of loss estimates, the requirements of the
Interagency Policy Statements on the Allowance for Loan and Lease Losses, dated
December 21, 1993 and July 2, 2001, and examiners' criticisms noted in the
Report of Examination. Within 60 days of this Agreement, the Bank shall submit a
description of the reserve methodology to the Reserve Bank and the Division.
Thereafter, at a minimum on a calendar quarterly basis the Bank shall conduct an
10
assessment of its loan loss reserve and, within 30 days of the end of each
calendar quarter, shall submit to the Reserve Bank and the Division the
quarterly assessment, including the methodology used in determining the amount
of loan loss reserve for that quarter. The Bank shall maintain for subsequent
supervisory review documentation to support the methodology used for each
quarterly assessment.
INTERNAL CONTROL PROCEDURES
9. Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank and the Division acceptable written procedures designed to
strengthen and maintain the Bank's internal controls. The procedures shall, at a
minimum, address, consider, and include:
(a) Transactions between the Bank and its affiliates to ensure
compliance with sections 23A and 23B of the Federal Reserve
Act and sections 1109.54 and 1109.55 of the Ohio Revised
Code; and
(b) compliance with applicable state lending limits set forth in
section 1109.22 of the Ohio Revised Code and section
1301:1-3-01 of the Ohio Administrative Code.
APPROVAL ORDER
10. Within 90 days of this Agreement, the Bank shall limit the
activities of its operating subsidiary Rurban Mortgage Company to activities the
Division has approved for the operating subsidiary or divest of any assets
inconsistent with the Approval order issued by the Division, dated October 4,
1997.
11
CONTINGENCY LIQUIDITY PLAN
11. Within 90 days of this Agreement, the Bank shall submit to the Reserve
Bank and the Division an acceptable contingency funding plan to identify
potential liquidity funding sources.
COMPLIANCE WITH LAWS AND REGULATIONS
12. The Bank shall immediately take all necessary steps consistent with
sound banking practices to correct all violations of laws and regulations set
forth in the Report of Examination. In addition, the Bank's board of directors
shall take necessary steps to ensure the Bank's future compliance with all
applicable laws and regulations.
DIVIDENDS
13. (a) Rurban and the Bank shall not declare or pay any dividends without
the prior written approval of the Reserve Bank, the Director of the Division of
Banking Supervision and Regulation of the Board of Governors, and the Division.
All requests for prior approval shall be received by the Reserve Bank and the
Division at least 30 days prior to the proposed dividend declaration date and
shall contain, but not be limited to, current and projected information on
consolidated earnings, and cash flow, capital, asset quality, and loan loss
reserve needs of the Bank.
(b) Rurban shall not take dividends or any other form of payment
representing a reduction in capital from the Bank without the prior written
approval of the Reserve Bank and the Division.
12
DEBT AND STOCK REDEMPTION
14. (a) Rurban shall not, directly or indirectly, incur any debt without
the prior written approval of the Reserve Bank and the Division. All requests
for prior written approval shall contain, but not be limited to, a statement
regarding the purpose of the debt, the terms of the debt, and the planned
source(s) for debt repayment, and an analysis of the cash flow resources
available to meet such debt repayment.
(b) Rurban shall not redeem any stock without the prior written
approval of the Reserve Bank and the Division.
BUSINESS PLAN
15. (a) Within 90 days of this Agreement, Rurban and the Bank shall submit
to the Reserve Bank and Division a joint written business plan and budget for
the remainder of 2002, which shall, at a minimum, provide for or describe:
(i) The major areas in and means by which Rurban and the Bank will
improve operating performance;
(ii) financial performance objectives, including plans for asset
growth, earnings, liquidity, and capital supported by detailed
quarterly and annual pro forma financial statements, including
projected budgets, balance sheets, and income statements;
(iii) a description of the operating assumptions that form the basis
for, and adequately support, major projected income and expense
components, including the compensation level and bonuses of
senior officers and directors, Xxxxxx's and the Bank's deferred
tax
13
position, and provisions needed to establish and maintain
adequate loan loss reserves; and
(iv) a budget review process incorporating the use of pro forma
income statements in the analysis of budgeted versus actual
income and expenses.
(b) A business plan and budget for each calendar year subsequent to
2002 shall be submitted to the Reserve Bank and the Division at least one month
prior to the beginning of that calendar year.
COMPLIANCE WITH AGREEMENT
16. Within 15 days of this Agreement, the boards of directors of Rurban and
the Bank shall appoint a joint committee (the "Compliance Committee") to monitor
and coordinate Rurban's and the Bank's compliance with the provisions of this
Agreement. The Compliance Committee shall be comprised of three or more outside
directors who are not executive officers or principal shareholders of Rurban or
the Bank, as defined in section 215.2(e)(1) of Regulation O of the Board of
Governors (12 C.F.R. 215.2(3)) and Ohio Administrative Code section
1301:1-3-04(A)(6). At a minimum, the Compliance Committee shall keep detailed
minutes of each meeting, and shall report its findings to the board of directors
on a monthly basis.
(b) Within 30 days after the end of each calendar quarter (September
30, December 31, March 31, and June 30) following the date of this Agreement,
the boards of directors of Rurban and the Bank shall submit to the Reserve Bank
and the Division written progress reports detailing the form and manner of all
actions taken to secure compliance with
14
this Agreement and the results thereof. Such reports may be discontinued when
the corrections required by this Agreement have been accomplished and the
Reserve Bank and the Division have, in writing, released the Rurban and the Bank
from making further reports.
APPROVAL OF PLANS, POLICIES, AND PROCEDURES
17. The written plans, policies, and procedures and the identification of
the independent consultant required by paragraphs 1, 3, 6, 7, 9, and 11 of the
Agreement shall be submitted to the Reserve Bank and the Division for review and
approval. Acceptable plans, policies, and procedures shall be submitted within
the time periods set forth in the Agreement and an acceptable independent
consultant shall be retained within the time period set forth in paragraph 1 of
the Agreement. The Bank shall adopt the approved plans, policies, and procedures
within 10 days of approval by the Reserve Bank and the Division and then shall
fully comply with them. During the term of this Agreement, the approved plans,
policies, and procedures shall not be amended or rescinded without the prior
written approval of the Reserve Bank and the Division.
COMMUNICATIONS
18. All communications regarding this Agreement shall be sent to:
(a) X. Xxxxx Xxxxx
Senior Vice President
Federal Reserve Bank of Cleveland
East 6th & Superior
Cleveland, Ohio 44101-1387
15
(b) X. Xxxxx X'Xxxxxxx
Superintendent of Financial Institutions
Ohio Division of Financial Institutions
0 Xxxxx Xxxx Xxxxxx, 00xx Xxxxx
Xxxxxxxx, Xxxx 00000-0000
(c) Xxxxxxx Xxxxxxx
Chief Executive Officer
Rurban Financial Corp.
000 Xxxxxxx Xxxxxx
Xxxxxxxx, Xxxx 00000
19. Notwithstanding any provision of this Agreement to the Contrary, the
Reserve Bank and the Division may, in their sole discretion, grant written
extensions of time to Rurban and the Bank to comply with any provision of this
Agreement.
20. The provisions of this Agreement shall be binding upon Rurban, the
Bank, and all of their institution-affiliated parties and regulated persons, in
their capacities as such, and their successors and assigns.
21. Each provision of this Agreement shall remain effective and
enforceable until stayed, modified, terminated or suspended by the Reserve Bank
and the Division.
22. The provisions of this Agreement shall not bar, estop, or otherwise
prevent the Board of Governors, the Reserve Bank, or the Division, or any other
federal or state agency from taking any other action affection Rurban or the
Bank or any of their current or former institution-affiliated parties or
regulated persons and their successors and assigns.
16
23. This Agreement is a "written agreement" for the purposes of, and is
enforceable by the Board of Governors as an order issued under, section 8 of
the FDI Act (12 U.S.C. 1818).
24. This Agreement is a "written agreement" under sections 1121.32(A),
1121.33(A)(1)(a)(iv), and 1121.35(B) of the Ohio Revised Code. Violation of a
written agreement is grounds for the Division to pursue a cease and desist
order, civil money penalties, and/or the removal of any regulated person.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the 5 day of July 2002.
Rurban Financial Corp. Federal Reserve Bank of Cleveland
By: /s/ Xxxxxx X. XxxXxxxxx By: /s/ X. Xxxxx Xxxxx
----------------------------- -----------------------------
Xxxxxx X. XxxXxxxxx R. Xxxxx Xxxxx
Chairman Senior Vice President
The State Bank and Trust Company Ohio Division of Financial Institutions
By: /s/ Xxxxxx X. XxxXxxxxx By: /s/ X. Xxxxx X'Xxxxxxx
----------------------------- -----------------------------
Xxxxxx X. XxxXxxxxx F. Xxxxx X'Xxxxxxx
Chairman Superintendent of Financial
Institutions
17
