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[¶10,026] In the Matter of Acadia State Bank, Baton Rouge, Louisiana, Docket No. FDIC-89-222b (11-27-89).
Bank to cease and desist from practices such as engaging in hazardous lending and lax collection practices; and operating with a large volume of poor quality loans, with an inadequate loan valuation reserve, with inadequate provisions for liquidity, with inadequate routine and controls policies, in such a manner as to produce low earnings, with management whose policies and practices are detrimental to Bank, and with Directors who have failed to adequately supervise the Bank. (This order was terminated by order of the FDIC dated 4-8-94; see ¶ 15,848.)
[.1] Management—Qualifications—Compliance
[.2] Definition—"Senior Executive Officers"
[.3] Primary Capital—Increase—Methods
[.4] Profit Plan—Minimum Requirements—Review
[.5] Assets—Adversely Classified—Reduce
[.6] Loans—Extension of Credit—Curtail—Exceptions
[.7] Loan Policy—Minimum Requirements—Review
[.8] Loan Portfolio—Periodic Review
[.9] Loans—Concentration—Reduce
[.10] Loan Loss Reserve—Adequacy—Review
[.11] Financial Condition—Amendment—Filing
[.12] Violations of Law—Eliminate and/or Correct
[.13] Liquidity and Funds—Management—Minimum Requirements
[.14] Bank Operations—Written Plan—Review
[.15] Compliance—Progress Reports—Frequency
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In the Matter of
ACADIA STATE BANK
BATON ROUGE, LOUISIANA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
Acadia State Bank, Baton Rouge, Louisiana ("Depository Institution"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Depository Institution and of its right to a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, 103 Stat. 183–553 (1989) (to be codified at 12 U.S.C. § 1818(b)(1)), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated November 9, 1989, 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 Depository Institution consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
The FDIC considered the matter and determined that it had reason to believe that the Depository Institution had engaged in unsafe or unsound banking practices and had committed violations of law and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED that the Depository Institution, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Depository Institution, cease and desist from the following unsafe or unsound banking practices and violations:
(a) engaging in hazardous lending and lax collection practices;
(b) operating with a large volume of poor quality loans;
(c) operating with an inadequate loan valuation reserve;
(d) operating with inadequate provisions for liquidity;
(e) operating with inadequate routine and controls policies;
(f) operating in such a manner as to produce low earnings;
(g) operating in violation of section 22(h) of the Federal Reserve Act, as amended, 12 U.S.C. § 375b, and section 215.4(a) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(a), made applicable to state nonmember banks by section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2), amended by FIRREA, Pub. L. No. 101-73, 103 Stat. 183–553 (1989) (to be codified at 12 U.S.C. § 1828(j)(2)); section 337.2 of the FDIC Rules and Regulations, 12 C.F.R. § 337.2, and sections 282(b) and 415(A)(1) of Title 6 of the Louisiana Revised Statutes of 1950, La. Rev. Stat. Ann. §§ 6:282(b) and 6:415(A)(1);
(h) operating with management whose policies and practices are detrimental to the Depository Institution and jeopardize the safety of its deposits; and
(i) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Depository Institution.
IT IS FURTHER ORDERED that the Depository Institution take affirmative action as follows:
[.1] 1. (a) During the life of this ORDER, the Depository Institution shall have management qualified to restore the Depository Institution to a sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible for supervising the Depository Institution'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 Depository Institution in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, and earnings adequacy; and
(iii) Comply with all applicable State and Federal laws and regulations.
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(c) (i) During the life of this ORDER, the Depository Institution shall notify the Regional Director of the Memphis Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the State of Louisiana ("Commissioner") in writing of any resignations and/or terminations of members of its board of directors and senior executive officers.
(ii) The Depository Institution shall comply with section 914(a) of FIRREA, Pub. L. No. 101-73, § 914(a), 103 Stat. 183, 484-85 (1989) (to be codified at 12 U.S.C. § 1842), which includes a requirement that the Depository Institution shall notify the Regional Director and the Commissioner in writing of any additions to its board of directors and senior executive officers. The notification must include the identity, personal history, business background and experience, including the individual's business activities and affiliations during the past five (5) years, and a description of any material pending legal or administrative proceedings in which the individual is a party and any criminal indictment or conviction of such individual by a State or Federal court. The notification shall be provided at least 30 days prior to the individual assuming the new position and the Depository Institution may not add such individual if the Regional Director issues a notice of disapproval of such addition before the end of the 30 day period beginning on the date the Regional Director receives notice of the proposed action.
[.2] (d) For purposes of this ORDER the term "senior executive officers" shall mean the chairman and vice-chairman of the board of directors, the president, each vice president and the senior lending officer of the Depository Institution. The term shall also include any persons who have the functions, duties or responsibilities normally associated with those titles but are not specifically so named.
(e) To ensure both compliance with this ORDER and qualified management for the Depository Institution, the board of directors, within 90 days from the effective date of this ORDER shall develop a written policy ("Management Policy") which shall incorporate an analysis of the Depository Institution's management and staffing requirements and shall, at a minimum, address (i) both the number and type of positions needed to properly manage the Depository Institution, (ii) a clear and concise description of the needed experience and pay for each job, (iii) an evaluation of present management, (iv) a plan to recruit, hire or replace personnel with requisite ability and experience, (v) a periodic evaluation of each individual's job performance, and (vi) the establishment of procedures to periodically review and update the Management Policy.
The Management Policy and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. Within 30 days from receipt of any comment, and after consideration of such comment, the board of directors shall approve the Management Policy which approval shall be recorded in the minutes of the meeting of the board of directors. Thereafter, the Depository Institution and its directors, officers and employees shall implement and follow the Management Policy and any modifications thereto.
(f) 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 Depository Institution 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.
(g) For the purposes of this ORDER, an "outside director" shall be an individual:
(i) Who shall not be employed, in any capacity, by the Depository Institution or its affiliates other than as a director of the Depository Institution or an affiliate;
(ii) Who shall not own or control more than 5 percent of the voting stock of the Depository Institution or its holding company;
(iii) Who shall not be indebted to the Depository Institution or any of its affiliates in an amount greater than 5 percent
{{4-1-90 p.C-127}}of the Depository Institution's primary capital; and
(iv) Who shall not be related to any directors, principal shareholders of the Depository Institution or affiliate of the Depository Institution.
[.3] 2. (a) During the life of this ORDER, the Depository Institution shall maintain adjusted primary capital equal to or greater than eight (8.0) percent of the Depository Institution's adjusted Part 325 total assets.
(b) Any increase in primary capital necessary to meet the ratio required by Paragraph 2(a) of this ORDER may be accomplished by the following:
(i) The sale of new securities in the form of common stock or perpetual preferred stock; or
(ii) The direct contribution of cash by the directors, shareholders, or parent bank holding company of the Depository Institution; or
(iii) The collection in cash of assets classified "Loss" without loss or liability to the Depository Institution; or
(iv) The collection of assets previously charged-off; or
(v) Any other method acceptable to the FDIC.
(c) If all or part of any increase in primary capital required by Paragraph 2(a) of this ORDER is accomplished by the sale of new securities, the board of directors of the Depository Institution 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 Depository Institution's securities (including a distribution limited only to the Depository Institution's existing shareholders), the Depository Institution shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Depository Institution 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 and Disclosure Unit, Washington, D.C. 20429. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination.
(d) In complying with the provisions of Paragraph 2 of this ORDER, the Depository Institution shall provide to any subscriber and/or purchaser of the Depository Institution'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 Depository Institution 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 Depository Institution's securities who received or was tendered the information contained in the Depository Institution's original offering materials.
(e) For purposes of this ORDER the terms "primary capital", "total capital" and "Part 325 total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively subsections 325.2(h), 325.2(1) and 325.2(k), 12 C.F.R. 325.2(h), (l), (k). The "Analysis of Capital" schedule on page 3 of the FDIC Report of Examination provides the method for determining the ratio of adjusted primary capital to adjusted Part 325 total assets as required by this ORDER.
[.4] 3. (a) Within 60 days of the effective date of this ORDER, and within 30 days of each calendar year thereafter, the board of directors shall establish a committee of the board of directors with the responsibility to develop a written profit plan consisting of goals and strategies to improve earnings and to control overhead and other expenses in order to increase the profitability of the Depository Institution. At least two-thirds of the members of such committee shall be outside directors as defined by Paragraph 1(g). The written profit plan shall include, at a minimum:
(i) A review of the salary and other compensation paid to each director and executive officer to determine whether the compensation received by each such person is reasonable in relation to the
{{4-1-90 p.C-128}}services provided to the Depository Institution.
(ii) A review of the Depository Institution's options with regard to its premises expense.
(iii) Identification of the major areas in, and means by, which the board of directors will seek to improve the Depository Institution's operating performance;
(iv) Realistic and comprehensive budgets;
(v) A budget review process to monitor the income and expenses of the Depository Institution to compare actual figures with budgetary projections on not less than a quarterly basis; and
(vi) A description of the operating assumptions that form the basis for, and adequately support, the major projected income and expense components of Paragraphs 3(a)(i) through 3(a)(v), above.
(b) Each written profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan which approval shall be recorded in the minutes of the board of directors. Thereafter, the Depository Institution, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification.
[.5] 4. (a) Within 10 days from the effective date of this ORDER, the Depository Institution shall eliminate from its books, by charge-off or collection, all assets classified "Loss" and one-half of the assets classified "Doubtful" as of June 9, 1989, that have not been previously collected or charged-off. Reduction of these assets through proceeds of other loans made by the Depository Institution is not considered collection for the purpose of this paragraph.
(b) Within 90 days from the effective date of this ORDER, the Depository Institution shall have reduced the assets classified "Substandard" as of June 9, 1989 and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $3,800,000.
(c) Within 180 days from the effective date of this ORDER, the Depository Institution shall have reduced the assets classified "Substandard" as of June 9, 1989 and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $3,500,000.
(d) Within 270 days from the effective date of this ORDER, the Depository Institution shall have reduced the assets classified "Substandard" as of June 9, 1989 and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $3,200,000.
(e) Within 360 days from the effective date of this ORDER, the Depository Institution shall have reduced the assets classified "Substandard" as of June 9, 1989 and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $3,000,000.
(f) The requirements of Paragraphs 4(a), 4(b), 4(c), 4(d), and 4(e) above are not to be construed as standards for future operations and, in addition to the foregoing, the Depository Institution shall eventually reduce the total of all adversely classified assets. As used in Paragraphs 4(b), 4(c), 4(d), 4(e), and 4(f) 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.
[.6] 5. (a) Beginning with the effective date of this ORDER, the Depository Institution 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 Depository Institution that has been charged-off or classified, in whole or in part, "Loss" or "Doubtful" and is uncollected. The requirements of this paragraph shall not prohibit the Depository Institution from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.
(b) Beginning with the effective date of this ORDER, the Depository Institution shall not make any further extensions of credit, directly or indirectly, to any borrower whose loans are adversely classified "Substandard" as of June 9, 1989, without prior approval by the Depository Institution's board of directors after the board's affirmative determination, as reflected in the minutes of the meeting, that the extension of credit is in full compliance with the Depository Institution's loan policy, that
{{4-1-90 p.C-129}}the extension of credit is necessary to protect the Depository Institution's interest or is adequately secured, that credit analysis has determined the customer to be creditworthy, and that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title and lien documents.
[.7] 6. (a) Within 60 days from the effective date of this ORDER, the Depository Institution shall review its written loan policy and make whatever changes may be necessary to provide for the safe and sound administration of all aspects of the lending function. Specific procedures shall be included for prior approval of loans to directors, officers and principal shareholders and their related interests in compliance with applicable laws and regulations. Loan documentation, repayment programs, collection and charge-off procedures and internal loan review shall also be included as a part of the review. The Depository Institution shall adopt changes it considers necessary and appropriate and management shall reaffirm its intent to comply with the policy, as amended. Evidence of management's reaffirmation shall be reduced to writing. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.
(b) Beginning with the effective date of this ORDER, the Depository Institution shall initiate and implement a program to strengthen its credit files and correct the technical exceptions as detailed on pages 2-e and 2-e-1 of the June 9, 1989 Report of Examination. In all future operations, the Depository Institution shall ascertain that all documents or evidence thereof, properly completed, are obtained before credit is extended.
[.8] 7. (a) Within 30 days of the effective date of this ORDER, the board shall establish an internal loan review and grading system ("System") to periodically review the Depository Institution's loan portfolio and identify and categorize problem credits. At a minimum the System shall provide for:
(i) Identifying 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 reason(s) why the particular loan merits special attention;
(v) Credit and collateral documentation exceptions;
(vi) The identification and status of each violation of law, rule or regulation;
(vii) Loans not in conformance with the Depository Institution's lending policy, and exceptions to the Depository Institution's lending policy;
(viii) Insider loan transactions; and
(ix) A mechanism for reporting periodically 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 Depository Institution to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.
[.9] 8. Within 180 days from the effective date of this ORDER (unless within 60 days an alternative timetable or proposal is submitted by the Depository Institution and approved in writing by the Regional Director and the Commissioner), the Depository Institution shall reduce each loan concentration as of June 9, 1989, to an amount which shall be less than 25 percent of the Depository Institution's total equity capital and reserves for each individual concentration. In addition, the Depository Institution shall not make any new extensions of credit, directly or indirectly, to any borrower whose loans in the aggregate equal 25 percent or more of the Depository Institution's total equity capital and reserves.
[.10] 9. (a) Within 30 days from the effective date of this ORDER, the Depository Institution shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve shall be established by charges to current operating income, together with collection of assets previously charged-off. In complying with the provisions of this paragraph, the board of directors of the Depository Institution shall review the adequacy of the Depository Institution's reserve for loan losses prior to the
{{4-1-90 p.C-130}}end of each quarter. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of any increase in the reserve, and the basis for determination of the amount of the reserve provided.
[.11] (b) Within 30 days from the effective date of this ORDER, the Depository Institution shall review all Reports of Condition and Income filed with the FDIC on and after June 9, 1989 and shall amend and file with the FDIC amended Reports of Condition and Income which accurately reflect the financial condition of the Depository Institution as of the date of each such Report. At a minimum each such Report shall be amended to reflect elimination of all assets classified "Loss" and one-half of the assets classified "Doubtful" as required by Paragraph 4(a) of this Order and shall incorporate an adequate reserve for loan losses accurately reflecting the Depository Institution's loan portfolio as of June 9, 1989, as required by Paragraph 9(a).
[.12] 10. Within 60 days from the effective date of this ORDER, the Depository Institution shall eliminate and/or correct all violations of law which are set out on pages 6-b and 6-b-1 of the Report of Examination of the Depository Institution as of June 9, 1989. In addition, the Depository Institution shall henceforth comply with all applicable laws and regulations.
[.13] 11. Within 60 days from the effective date of this ORDER, the Depository Institution shall formulate and adopt a written liquidity and funds management policy. Such policy shall include the establishment of acceptable ranges of ratios in the following areas: volatile liability dependence, total loans to total deposits and temporary investments to volatile liabilities. In addition, the liquidity policy shall incorporate a funds management program which designates acceptable levels for: volatile liabilities, including borrowings; asset mix, including temporary funds and investments, long-term investment securities and classes of obligors, and loans to deposits; and rate-sensitive assets as a percent of rate-sensitive liabilities. The written liquidity and funds management policy shall be submitted to the Regional Director and the Commissioner for review and comment.
[.14] 12. Within 60 days from the effective date of this ORDER, the Depository Institution shall adopt and implement a written policy for the operation of the Depository Institution in such a manner as to provide internal routine and controls consistent with safe and sound banking practices. Such policy and its implementation shall be satisfactory to the Regional Director as determined at subsequent examinations and/or visitations.
[.15] 13. 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 Depository Institution 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 has released the Depository Institution in writing from making further reports.
The provisions of this ORDER shall be binding upon the Depository Institution, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Depository Institution.
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.
Pursuant to delegated authority.
Dated: November 27, 1989
