FEDS AND BANK AGREE TO MANAGEMENT PLAN

First Exchange Bank Corp. of Cape Girardeau and the Federal Reserve System Board of Governors have entered into an agreement designed to prevent financial problems within the bank-holding corporation and its five subsidiary banks, the Federal Reserve Board announced on Thursday.

The agreement, called a cease-and-desist order, was issued Monday after the First Exchange Corp. Board of Directors consented to terms of the order through a board resolution of Sept. 12.

The order, under jurisdiction of the Federal Reserve Board of St. Louis, said that, First Exchange Corp. "has engaged in, is engaging in, and unless restrained, will continue to engage in certain unsafe or unsound practices and violations of law in conducting the business of the First Exchange."

Lee Whitler, president and chief executive officer of First Exchange, said the corporation "is in agreement with all of the provisions" of the order "and we think it is a workable plan that will provide guidance to management."

Whitler said the corporation's consent to the order illustrates that "we are going to operate safely and soundly, and that our customers' money is safe in all of our banks and that we are adequately capitalized."

He said: "The role of the Federal Reserve Board in the '90s is to take a more active role in assisting banks in avoiding problems. A cease-and-desist order provides guidance in addressing weaknesses. It establishes an open channel of communication back and forth. When the Federal Reserve Board determines it would like to see changes, (changes) can be made more quickly. We see this as the right thing to do."

Bob Moore of the Federal Reserve Board in St. Louis refused to elaborate on the order, which the board released in its entirety.

The 20-page order establishes a number of requirements and conditions on the corporation and its five subsidiary banks: Jackson Exchange Bank and Trust Co. of Jackson; First Exchange Bank of Cape Girardeau; First Exchange Bank of Madison County at Fredericktown; First Exchange Bank of St. Louis at St. Louis; and First Exchange Bank of North St. Louis County at Florissant.

The corporation agreed to file reports of intentions and to submit proposals on various business transactions to the Federal Reserve Board, which delegated oversight of the order's conditions to the Federal Reserve Bank of St. Louis.

Among conditions of the order are:

First Exchange Corp. shall not declare or pay dividends or take dividends or any other form of payment representing a reduction of capital from its banks without written approval of the Federal Reserve Bank of St. Louis.

Whitler said it has not been determined whether the corporation will pay dividends.

Within 30 days, First Exchange must submit to the reserve bank a written plan to "improve and, thereafter, maintain the organization's consolidated capital and the capital position at each of its subsidiary banks."

The order said the plan must consider the current and future capital requirements of the banks, "particularly in view of the high volume of their adversely classified assets and the potential for additional asset quality problems at the subsidiary banks."

Whitler said First Exchange has experienced growth and has "significantly increased its loan portfolio." He said, because of that, reserves are being set aside to take into account a declining number of real-estate loans.

The plan also must address the corporation's responsibility to act as "a source of strength" to its subsidiary banks.

Whitler said capital can be moved from one bank to another, a practice that is acceptable to the corporate board. As a matter of policy, he said, "if a bank-holding company has capital and one of its banks is in need of it, it should freely inject it into the bank. In the past there have been many occasions that we have done this; it is not unusual."

First Exchange must take all necessary actions to ensure that it does not sell or issue common or preferred stock to anyone who funds the stock purchase with extensions of credit from any of its subsidiary banks, and that subsidiary banks do not make extensions of credit to anyone to purchase First Exchange stock.

Whitler said, "If we sell additional common stock, all funds will come from outside sources." He said, however, it is not unusual for companies to have employee plans in which employees hold a certain percentage of company stock.

First Exchange shall not increase its borrowings or incur additional debt, including subordinated debenture bonds, without the written approval of the reserve bank.

The corporation must ensure that holders of First Exchange's subordinated debenture bonds are informed that the debentures are not insured by the Federal Deposit Insurance Corp., and are not an obligation of any subsidiary bank.

Like stock, the sale of subordinated debenture bonds is a method used by businesses to secure funding. Whitler said debenture-bond buyers are told the bonds are not federally insured, but the Federal Reserve now requires that a statement to that effect appears on the bonds.

Within 60 days of the order, First Exchange shall submit to the reserve bank a written plan, including appropriate financial projections, to service its debt. Also within 60 days, it must submit to the reserve bank a written plan concerning proposed corporate operational strategies for First Exchange and its banks for 1992 and 1993.

First Exchange shall not engage in any transaction with subsidiary banks without written approval of the reserve bank.

The corporation immediately must reimburse applicable subsidiary banks the amount of tax overpayments outstanding as of Monday and all unreimbursed expenses as of Feb. 25, plus interest at the subsidiary banks' prime rates.

Whitler said that requirement clarifies an operational procedure designed to assure that the corporation returns to the banks overpayment of taxes after the corporation files consolidated tax returns.

First Exchange shall not have any involvement or interfere in the lending and investment decisions of its subsidiary banks or a bank in Little Rock, Ark. Within 30 days of the order, it shall relinquish all managerial influence and decision-making control over the Little Rock bank.

Whitler said the reason for those requirements is to emphasize decision-making by bank officials and to clarify a holding company's role in providing support to the banks. He said First Exchange Corp. owns and has always owned just 5 percent of the Little Rock bank, and it is not a subsidiary.

First Exchange must divest itself of property being held in violation of banking laws.

Whitler said the law requires banks to rid themselves of undeveloped land they have owned for five years. He said First Exchange Bank of Cape Girardeau has land adjacent to its building that has not been developed for five years.

"It's not a severe violation," said Whitler, adding the land is for sale.