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FDIC Enforcement Decisions and Orders

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{{4-30-91 p.C-257}}
   [10,051] In the Matter of Bank of the Hills, Austin, Texas, Docket No. FDIC-90-21b (2-22-90).

   Bank to cease and desist from practices such as operating with management whose practices are detrimental to Bank, with inadequate supervision by Directors, with inadequate capital protection, with an excessive level of adversely classified assets; engaging in hazardous lending and lax collection practices; operating with an inadequate loan loss reserve and with inadequate written loan policies; extending credit which is inadequately secured and without adequate documentation; refinancing borrowers in weak financial positions without improving collateral margins or establishing structured repayment programs; renewing or extending loans without collecting interest due or obtaining adequate additional collateral; failing to accurately reflect Bank's financial condition in Reports; operating without adequate liquidity and proper regard for funds management and without an adequate investment policy; heavy reliance on short-term potentially volatile deposits as a source for funding longer-term investments; and violating federal and state laws. (This order was terminated by order of the FDIC, dated 2-13-91; see ¶15,229.)

   [.1] Primary Capital—Increase—Methods
   [.2] Shareholders—Dividends—Approval
   [.3] Assets—Adversely Classified—Reduce
   [.4] Loan Loss Reserve—Adequacy—Review
   [.5] Loans—Extensions of Credit—Curtail
   [.6] Management—Qualifications—Compliance
   [.7] Board of Directors—Compliance Committee—Written Reports
   [.8] Definition—"Outside Director"
   [.9] Board of Directors—Reorganization—Outside Directors
   [.10] Loan Policy—Minimum Requirements—Review
   [.11] Loan Portfolio—Periodic Review
   [.12] Violation of Law—Eliminate/Correct—Compliance
   [.13] Technical Exceptions—Eliminate/Correct
   [.14] Funds Management Policy—Minimum Requirements—Review
   [.15] Business Plan—Minimum Requirements—Review
   [.16] Loan Participations—Curtail—Exceptions
   [.17] Shareholders—Disclosure—Cease and Desist Order
   [.18] Compliance—Progress Reports—Frequency

In the Matter of

BANK OF THE HILLS
AUSTIN, TEXAS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   The Bank of the Hills, Austin Texas ("Insured Institution"), 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 Insured Institution and of its right to a hearing on the alleged charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), as amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989) (to be codified at 12 U.S.C. § 1818(b)), 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 {{4-30-91 p.C-258}}Federal Deposit Insurance Corporation ("FDIC") dated January 31, 1990, 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 Insured 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 Insured Institution had engaged in unsafe and unsound banking practices and had violated laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS ORDERED, that the Insured Institution and institution-affiliated parties of the Insured Institution cease and desist from the following unsafe or unsound banking practices and violations of laws and/or regulations:

       (a) Operating the Insured Institution with management whose policies and practices are detrimental to the Insured Institution and jeopardize the safety of its deposits;
       (b) Operating the Insured Institution without adequate supervision and direction by the board of directors over the management of the Insured Institution;
       (c) Operating with an inadequate level of capital protection;
       (d) Operating the Insured Institution with an excessive level of adversely classified assets;
       (e) Engaging in hazardous lending and ineffective and lax collection practices;
       (f) Failing to provide an adequate reserve for loan losses;
       (g) Operating the Insured Institution without adequate written loan policies and procedures;
       (h) Operating the Insured Institution in contravention of written loan policies and procedures;
       (i) Extending credit which is inadequately secured and without adequate and appropriate supporting documentation;
       (j) Refinancing credits to borrowers in weak financial positions without improving collateral margins or establishing structured repayment programs;
       (k) 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;
       (l) Failing to accurately reflect the condition of the Insured Institution in published statements and Consolidated Reports of Condition and Reports of Income;
       (m) Operating without adequate liquidity and proper regard for funds management;
       (n) Operating the Insured Institution without an adequate investment policy which addresses funding strategies and liquidity objectives;
       (o) Operating the Insured Institution with a heavy reliance on short-term potentially volatile deposits as a source for funding longer-term investments;
       (p) Operating in violation of applicable Federal and State laws and regulations as more fully set forth on pages 6-c through 6-c-5 of the Report of Examination of the Insured Institution as of July 31, 1989.
   IT IS FURTHER ORDERED, that the Insured Institution and institution-affiliated parties of the Insured Institution take affirmative action as follows:

[.1] 1. (a) Within 90 days after the effective date of this ORDER, the Insured Institution shall increase its primary capital by no less than $11,500,000; and for so long thereafter as this ORDER is outstanding, the Insured Institution shall attain and thereafter maintain adjusted primary capital equal to or greater than: 6.5 percent of the Insured Institution's adjusted total assets by December 31, 1990; 6.75 percent of the Insured Institution's adjusted total assets by December 31, 1991, and 7.5 percent of the Insured Institution's adjusted total assets by December 31, 1992. Such increase in primary capital and any increase in primary 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 collection in cash of assets classified Loss or Doubtful as of July 31, 1989, and charged off in accordance with the provisions of this ORDER without loss or liability to the Insured Institution; or
       (iii) The collection in cash of assets charged off prior to July 31, 1989; or
    {{4-1-90 p.C-259}}
       (iv) The direct contribution of cash subsequent to July 31, 1989 by the parent Insured Institution holding company; or
       (v) Any other method approved by the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") and the Banking Commissioner for the State of Texas ("Commissioner").
   (b) If the ratio of adjusted primary capital to adjusted total assets is less than 6.5* percent as determined at an examination or visitation by the FDIC or the State banking department ("State"), the Insured Institution shall, within 30 days after receipt of a written notice of the capital deficiency from the Regional Director or the Commissioner, present to the Regional Director and the Commissioner a plan to increase the primary capital of the Insured Institution or to take other measures to bring the ratio to 6.5* percent. After the Regional Director and Commissioner respond to the plan, the board of directors of the Insured Institution shall adopt the plan, including any modifications or amendments requested by the Regional Director and Commissioner. Thereafter, the Insured Institution shall immediately initiate measures detailed in the plan, to the extent such measures have not previously been initiated, to increase its primary capital by an amount sufficient to bring the ratio to 6.5* percent within 90 days after the Regional Director and the Commissioner respond to the plan.


* 6.50 percent by December 31, 1990
6.75 percent by December 31, 1991
7.50 percent by December 31, 1992
   (c) If all or part of the increase in primary capital required by this ORDER is to be accomplished by the sale of new securities, the board of directors of the Insured Institution 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 Insured Institution's securities (including a distribution limited only to the Insured Institution's existing shareholders), the Insured Institution shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Insured Institution and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with 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 Section, Washington, D.C. 20429, for review. Any changes requested to be made in the plan or the materials by the FDIC shall be made prior to their dissemination. If the increase in primary capital is provided by the sale of perpetual preferred stock and/or mandatory convertible debentures, then all terms and conditions of the issue including, but not limited to, those terms and conditions relative to interest rate and any convertibility factor shall be presented to the Regional Director for prior approval.
   (d) In complying with the provisions of this ORDER and until such time as any such public offering is terminated, the Insured Institution shall provide to any subscriber and/or purchaser of the Insured Institution'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 Insured Institution'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 Insured Institution's original offering materials.
   (e) For the purposes of the ORDER the terms "primary capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively subsections 325.2(h) and (k), 12 C.F.R. §325.2(h) and (k). "Adjusted primary capital" and "adjusted total assets" shall be calculated according to the methodology set forth in the Analysis of Capital section in a report of examination or visitation of the FDIC or the State.

   [.2] 2. While this ORDER is in effect, the Insured Institution shall not declare or pay either directly or indirectly any cash dividend to shareholders without the prior {{4-1-90 p.C-260}}written consent of the Regional Director and the Commissioner, if, after payment of such dividend, the ratio of adjusted primary capital to adjusted total assets would be less than 6.5* percent.
* 6.50 percent by December 31, 1990
6.75 percent by December 31, 1991
7.50 percent by December 31, 1992
   [.3] 3. (a) Upon the effective date of this ORDER, the Insured Institution 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 and one-half of the assets classified Doubtful by the FDIC as a result of its examination of the Insured Institution as of July 31, 1989. Reduction of these assets through proceeds of loans made by the Insured Institution is not considered "collection" for the purpose of this paragraph.
   (b) Within 60 days after the effective date of this ORDER, the Insured Institution shall submit a written plan to the Regional Director and the Commissioner to reduce the remaining assets classified Doubtful and Substandard as of July 31, 1989. 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 31, 1989 to levels representing not more than a specified percentage of total equity capital and reserves as reported each quarter by the Insured Institution in its Consolidated Reports of Condition and Reports of Income and shall include no less than six consecutive quarterly target dates;
       (ii) An explanation showing the complete rationale used by the Insured Institution in constructing the reduction schedule; and,
       (iii) A provision requiring, at a minimum, quarterly reviews by the Insured Institution's board of directors whereby the extent of the Insured Institution's compliance with the plan is expressly addressed with the results of each review to be recorded in the corporate minutes of the board of directors.
   (c) Upon written notice from the Regional Director or the Commissioner that the submitted plan is not acceptable, the Insured Institution 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 board of directors of the Insured Institution. The Insured Institution shall thereafter immediately initiate measures detailed in the plan to the extent such measures have not previously been initiated.
   (d) For purposes of the plan, the reduction of the level of adversely classified assets as of July 31, 1989, to a specified percentage of total equity capital and reserves 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 total equity capital and reserves.
   (e) While this ORDER is in effect, the Insured Institution shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as determined at any examination or visitation conducted by the FDIC or the State at such time as the report of examination or visitation is received by the Insured Institution.

   [.4] 4. (a) Within 10 days after the effective date of this ORDER, the Insured Institution shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve shall be established by charges to current operating income. Prior to the end of each calendar quarter, the board of directors of the Insured Institution shall review the adequacy of the Insured Institution's reserve for loan losses. Such reviews shall include, at a minimum, the Insured Institution's loan loss experience, an estimate of potential loss exposure in the portfolio, trends of delinquent and nonaccrual loans and prevailing and prospective economic conditions. The minutes of the board meetings at which such reviews are undertaken shall include complete details of the reviews and the resulting recommended increases in the reserve for loan losses.
   (b) Within 30 days after the effective date of this ORDER, the Insured Institution shall review Consolidated Reports of Condition and Reports of Income filed with the FDIC on or after June 30, 1989, and amend said reports if necessary to properly reflect {{4-1-90 p.C-261}}the financial condition of the Insured Institution as of the date of each such report. In particular, such reports shall contain an adequate provision for loan losses. Reports filed after the effective date of this ORDER shall also accurately reflect the financial condition of the Insured Institution as of the reporting date.

   [.5] 5. (a) While this ORDER is in effect, the Insured Institution 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 Insured Institution that has been classified Loss, in whole or in part, and is uncollected or to any borrower who is already obligated in any manner to the Insured Institution on any extension of credit, including any portion thereof, that has been charged off the books of the Insured Institution and remains uncollected. The requirements of this paragraph shall not prohibit the Insured Institution 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 Insured Institution 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, in whole or in part, and is uncollected unless the Insured Institution'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 Insured Institution. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.

   [.6] 6. The Insured Institution shall have and retain qualified management. At a minimum, such management shall include a chief executive officer with proven ability in managing a bank of comparable size and experience in upgrading a low quality loan portfolio. Such person shall be provided the necessary written authority to implement the provisions of this ORDER. The Insured Institution shall have and retain a senior lending officer who shall have an appropriate level of lending, collection and loan supervision experience for the type and quality of the Insured Institution's loans. The qualifications of management shall be assessed on its ability to: (i) comply with the requirements of the ORDER, (ii) operate the Insured Institution in a safe and sound manner, (iii) comply with applicable laws and regulations, and (iv) restore all aspects of the Insured Institution to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.

   [.7] 7. (a) Within 60 days after 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 Insured 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.

   [.8] (b) For the purposes of this ORDER, an "outside director" shall be an individual:

       (i) Who shall not be employed by the Insured Institution or its affiliates other than as a director of the Insured Institution or an affiliate;
       (ii) Who shall not own or control more than 5 percent of the voting stock of the Insured Institution or its holding company;
       (iii) Who shall not be related to any director, principal shareholder of the Insured Institution or to any director or principal shareholder of any affiliate of the Insured Institution; and
       (iv) Who shall be a resident of, or engage in business in, the Insured Institution's trade area.

   [.9] 8. (a) Within 90 days after the date of this ORDER, the Insured Institution shall prepare a plan for submission to the shareholders at their next meeting to reorganize the board of directors either by increasing the number of directors or by appointing new directors so that for so long as this ORDER is outstanding at least 50 percent of the members of the board shall be independent, outside directors as defined herein.
{{4-1-90 p.C-262}}

   [.10] 9. Within 60 days after the effective date of this ORDER, the Insured Institution shall revise, adopt, and implement written lending and collection policies and procedures to provide effective guidance and control over the Insured Institution's lending function. Such policies shall address, at a minimum, the deficiencies described on page 6-a of the July 31, 1989 Report of Examination and their implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations or visitations.

   [.11] 10. Within 90 days after the effective date of this ORDER, the board of directors shall reorganize its loan review committee to periodically review the Insured Institution's loan portfolio and identify and categorize problem credits. The committee shall file a report with the board of directors. Such report shall include the following information:
   (a) The overall quality of the loan portfolio;
   (b) The identification by type and amount of each problem or delinquent loan;
   (c) The identification of all loans not in conformance with the Insured Institution's lending policy; and
   (d) The identification of all loans to officers, directors, principal shareholders or their related interests.
   At least 50 percent of the members of the loan review committee shall be independent, outside directors as that term is defined in this ORDER.

   [.12] 11. After the effective date of this ORDER, the Insured Institution, consistent with sound banking practices, shall eliminate and/or correct all violations of laws and/or regulations existing in the Insured Institution as of July 31, 1989, as more fully set forth on pages 6-c through 6-c-5 of the July 31, 1989 Report of Examination. In addition, the Insured Institution shall ensure its future compliance with all applicable laws and regulations.

   [.13] 12. Within 90 days after the effective date of this ORDER, the Insured Institution, to the best of its ability using reasonable effort, shall eliminate and/or correct all technical exceptions with regard to loan documentation existing in the Insured Institution as of July 31, 1989, as more fully set out on pages 2-d through 2-d-3 of the July 31, 1989 Report of Examination.

   [.14] 13. Within 60 days after the effective date of this ORDER, the Insured Institution shall amend its written investment and funds management policies to address the deficiencies described in the July 31, 1989 Report of Examination and submit them to the Regional Director and the Commissioner for review. Within 30 days after their response, the policies, including any modifications or amendments requested by the Regional Director or Commissioner, shall be adopted by the board of directors of the Insured Institution. The Insured Institution shall thereafter immediately initiate measures detailed in the policies to the extent such measures have not previously been initiated. The policies shall include:
   (a) An asset/liability management strategy to achieve an acceptable rate sensitivity balance between investments and funding sources;
   (b) A plan to decrease the reliance of the Insured Institution on short-term, potentially volatile liabilities for funding longer-term assets;
   (c) Procedures which will enable the board and management to monitor the Insured Institution's liquidity position and maintain liquidity at an adequate level; and
   (d) A plan to reduce the extended maturity distribution of the securities portfolio.

   [.15] 14. Within 90 days after the effective date of this ORDER, the Insured Institution shall prepare and present to the Regional Director and the Commissioner a "Business Plan" projecting asset growth, loan growth, deposit growth and capital of such Insured Institution for the five-year period beginning as of the effective date of this ORDER. The Business Plan shall contain provisions to control the quality of the Insured Institution's growth, ensure that the ratio of adjusted primary capital to adjusted total assets shall not be less than 6.5 percent* during the life of this ORDER, and shall be updated annually to reflect any deviations or changes in the plan. After the Regional Director and the Commissioner respond to the Business Plan, the board of directors of the Insured Institution shall adopt the plan, including any modifications or amendments requested by the Regional Director and the Commissioner.
* 6.50 percent by December 31, 1990
6.75 percent by December 31, 1991
7.50 percent by December 31, 1992
{{4-1-90 p.C-263}}

   [.16] 15. While this ORDER is in effect, the Insured Institution shall not repurchase any loan participations unless legally obligated to do so if (a) the loan has been adversely classified at an examination or visitation conducted by the FDIC, the State, or any appropriate Federal depository institution regulatory agency and remains classified as of the date of repurchase, or (b) the loan exhibits any of the following characteristics:

       (i) The loan is in nonaccrual status or should be in nonaccrual status as defined in the instructions for preparation of Reports of Condition and Reports of Income; or
       (ii) The principal or interest payments on the loan are more than 30 days past due; or
       (iii) The terms of the loan have been renegotiated or compromised due to the deteriorating financial condition of the borrower.

   [.17] 16. After the effective date of this ORDER, the Insured Institution shall send to its shareholders or otherwise furnish a description of this ORDER, (1) in conjunction with the Insured Institution's next shareholder communication, and also (2) in conjunction with its notice or proxy statement preceding the Insured Institution'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, Registration and Disclosure Unit, 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.

   [.18] 17. 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 calendar quarter thereafter, the Insured 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 and the Commissioner have released the Insured Institution in writing from making further reports.
   18. The effective date of this ORDER shall be 10 days after the date of its issuance. This ORDER shall be binding upon the Insured Institution and institution-affiliated parties of the Insured Institution.
   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.
   Pursuant to delegated authority.
   Dated at Dallas, Texas, this 22nd day of February, 1990.

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