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FDIC Enforcement Decisions and Orders

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{{10-31-92 p.C-864}}
   [10,194] In the Matter of SouthCoast Bank Corporation, West Palm Beach, Florida, Docket No. FDIC-91-69b (3-14-91).

   Bank to cease and desist from failing to provide adequate supervision and direction over the affairs of the bank; operating with management whose policies are detrimental to the bank; operating with inadequate equity capital; operating with an excessive volume of adversely classified assets; engaging in hazardous lending and lax collection practices; operating with inadequate liquidity; failing to provide adequate supervision and direction over the affairs of the bank; failing to maintain an adequate loan loss reserve; operating in violation of law and regulations; and operating without adequate internal controls and accounting systems. (This order was terminated by order of the FDIC dated 8-11-92; see ¶15,505.)
   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase—Methods
   [.3] Assets—Adversely Classified—Reduce/Eliminate—Timetable
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
{{5-31-91 p.C-865}}
   [.5] Assets—Special Mention—Correct Deficiencies
   [.6] Loan Policy—Written Revision—Minimum Requirements—Review
   [.7] Loans—Overdue—Accrual of Interest
   [.8] Funds Management—Written Policy—Required—Review
   [.9] Budget and Earnings Forecast—Preparation Required—Review
   [.10] Allowance for Loan and Lease Losses—Establish/Maintain—Report
   [.11] Dividends—Restricted
   [.12] Violations of Law—Eliminate/Correct
   [.13] Bank Operations—Internal Routine and Controls—Establish
   [.14] Shareholders—Disclosure—Cease and Desist Order
   [.15] Compliance—Progress Reports—Frequency

In the Matter of

SOUTHCOAST BANK
CORPORATION

WEST PALM BEACH, FLORIDA
(Insured State Nonmember
Bank)
ORDER TO CEASE AND DESIST

   SouthCoast Bank Corporation, West Palm Beach, Florida ("Bank"), having been advised of its right to a written Notice of Charges and of Hearing detailing unsafe or unsound banking practices and violations of applicable laws and regulations alleged to have been committed by the Bank and of its right to a hearing regarding such alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 18181(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 a representative of the Legal Division of the Federal Deposit Insurance Corporation ("FDIC"), dated March 12, 1991, whereby solely for the purpose of this proceeding and without admitting or denying any of the alleged charges of unsafe or unsound banking practices and violations of applicable laws and regulations, the Bank 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 Bank had engaged in unsafe or unsound banking practices and had committed violations of applicable laws and regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank and its institution-affiliated parties, as such term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices and violations of laws and regulations:
   A. Failing to provide adequate supervision and direction over the affairs of the Bank by the board of directors of the Bank to prevent unsafe or unsound practices and violations of laws and regulations;
   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 with equity capital that is inadequate for the kind and quality of assets held by the Bank;
   D. Operating the Bank with an excessive volume of adversely classified assets and past due loans;
   E. Engaging in hazardous lending and ineffective and lax collection practices, including but not limited to: (i) failing to provide an adequate loan policy for the Bank; (ii) failing to provide an adequate loan review and grading system; (iii) failing to obtain complete credit information; and (iv) failing to enforce repayment programs;
   F. Operating the Bank with inadequate liquidity and with an excessive amount of volatile liabilities funding long-term assets;
   G. Engaging in practices which produce inadequate operating income and excessive loan loses;
   H. Failing to provide and maintain an adequate reserve for loan losses for the vol- {{5-31-91 p.C-866}}ume, kind and quality of loans held by the Bank;
   I. Engaging in violations of applicable Federal and state laws and regulations, as more fully described on pages 6-b through 6-b-3 of the FDIC's Report of Examination of the Bank as of August 16, 1990; and
   J. Failing to operate with adequate internal controls and accounting systems to prevent unsafe and unsound practices.
   IT IS FURTHER ORDERED that the Bank and its institution-affiliated parties take affirmative action as follows:

   [.1] 1. (a) Within 90 days from the effective date of this ORDER, the Bank 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 a qualified senior loan officer having an appropriate level of lending, collection and loan supervision experience necessary to supervise the upgrading of a low quality loan portfolio. Such persons shall be provided the necessary written authority to implement the provisions of this ORDER. The qualifications of management shall be assessed on its ability to (i) comply with the requirements of this ORDER, (ii) operate the Bank in a safe and sound manner, (iii) comply with applicable laws and regulations, and (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity. So long as this ORDER remains in effect, the Bank shall notify the Regional Director of the FDIC's Atlanta Regional Office ("Regional Director") and the Florida State Comptroller ("Comptroller") in writing of any proposed changes in management. Such notification shall be in addition to any application and prior approval requirements established by section 32 of the Act, 12 U.S.C. § 1831i, and implementing regulations; must include the names and qualifications of any replacement personnel; and must be provided at least thirty (30) days prior to the individual assuming the new position.
   (b) In order to have and retain qualified management, the board of directors of the Bank shall, within 60 days from the effective date of this ORDER, conduct or cause to be conducted a review of all delegations to employees, and an evaluation of the qualifications of all senior officers to meet the responsibilities of their positions. The board of directors shall consider such review and evaluation in reaching its conclusions regarding having and retaining qualified management. Such consideration shall be reflected in the board of directors' minutes.

   [.2] 2. (a) Within 180 days from the effective date of this ORDER, the Bank shall increase its Tier 1 capital by not less than $2,000,000. Such increase in Tier 1 capital may be accomplished by any one or more of the following:

       (i) The sale of new securities in the form of common stock or noncumulative perpetual preferred stock;
       (ii) The collection in cash of all or part of assets classified "Loss" or "Doubtful" as of August 16, 1990, and charged off in accordance with paragraph 3 of this ORDER;
       (iii) The direct contribution of cash by the directors and/or shareholders of the Bank;
       (iv) The collection in cash of assets previously charged off; or
       (v) Any other means acceptable to the Regional Director and the Comptroller.
    (b) (i) If all or part of the increase in the Bank's Tier 1 capital required under paragraph 2(a) of this ORDER involves a public distribution of the Bank's securities (including a distribution limited to the Bank's existing shareholders), the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with applicable Federal securities laws. Prior to the sale of such securities, and, in any event, not less than twenty (20) days prior to the dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429, and to the Comptroller for review.
       (ii) In complying with the provisions of paragraph 2(b)(i) of this ORDER, the Bank shall provide to any sub- {{5-31-91 p.C-867}}scriber and/or purchaser of Bank 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 Bank securities. The written notice required by this paragraph 2(b)(ii) shall be furnished within ten (10) calendar days from the date that such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of Bank securities who received or was tendered the information contained in the Bank's original offering materials.
   (c) Within 30 days after June 30, 1991, and within 30 days after each December 31 and June 30 thereafter while this ORDER remains in effect, the Bank's board of directors shall calculate the Bank's Tier 1 capital as a percentage of its total assets ("capital ratio") as of the nearest preceding December 31 or June 30 date. If such capital ratio is less than 6.0 percent, the Bank shall, within 90 days from the date of such calculation, increase its Tier 1 capital by an amount sufficient to raise its capital ratio to not less than 6.0 percent as of the nearest preceding June 30 or December 31 date.
   (d) In addition to the requirements of paragraphs 2(a) and 2(c) of this ORDER, for as long as this ORDER remains in effect, the Bank shall meet the minimum ratio requirements established for "risked-based capital" by the deadlines set out in Appendix A of Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, which Appendix A is entitled "Statement of Policy on Risked-Based Capital," and/or any subsequent amendments or modifications thereto.
   (e) For the purposes of this ORDER, the term "Tier 1 capital" shall mean the sum of common stockholders' equity, non-cumulative perpetual preferred stock (including any related surplus), and minority interests in consolidated subsidiaries, minus all intangible assets other than mortgage servicing rights, minus identified losses, and minus investments in securities subsidiaries subject to part 337 of the FDIC's Rules and Regulations, 12 C.F.R. Part 337.
   (f) For purposes of this ORDER, the term "total assets" shall mean the average of total assets required to be included in a banking institution's Reports of Condition and Income as these reports may from time to time be revised, as of the most recent report date (and after making any necessary subsidiary adjustments for state nonmember banks as described in Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325), minus intangible assets other than mortgage servicing rights, and minus assets classified loss and any other assets that are deducted in determining Tier 1 capital. For banking institutions, the average of total assets is found in the Reports of Condition and Income schedule of quarterly averages.

   [.3] 3. (a) Within 180 days from the effective date of this ORDER, the Bank shall reduce the aggregate dollar volume of all remaining assets classified "Substandard" and "Doubtful" in the FDIC's Report of Examination of the Bank as of August 16, 1990, to not more than $3,250,000; within 360 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $2,000,000; and within 540 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $500,000. The requirements of this paragraph 3(a) of the ORDER shall not be construed to establish a standard for future operations of the Bank.
   (b) Within 90 days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Comptroller a written plan of action to reduce each line of credit which was adversely classified by the FDIC as of August 16, 1990, and which aggregated $150,000 or more as of that date. Such plan of action shall thereafter be implemented by the Bank and monitored, and progress reports thereon shall be submitted by the Bank to the Regional Director and the Comptroller at 90-day intervals concurrently with the other reporting requirements set forth in paragraph 15 of this ORDER.
   (c) As used in this paragraph 3, "reduce" means to (i) collect, (ii) charge off, or (iii) improve the quality of such assets sufficiently to warrant removal of any adverse classification by the FDIC.

   [.4] 4. (a) Effective the date of this OR- {{5-31-91 p.C-868}}DER, the Bank 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 Bank that has been charged off or classified, in whole or in part, "Loss" or "Doubtful", and is uncollected.
   (b) Effective the date of this ORDER, the Bank 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 Bank that has been classified, in whole or in part, "Substandard", and is uncollected, unless, prior to the extension of credit a majority of the Bank's board of directors first: (i) determines that such advance is in the best interest of the Bank; (ii) determines that the bank has satisfied the requirements set out in paragraph 3(b) of this ORDER as to such borrower; and (iii) approves such advance. A written record of the board of directors' determination and approval of any advance under this paragraph 4(b) shall be maintained in the credit file(s) of the affected borrower(s) as well as the minutes of the board of directors.
   (c) The requirements of this paragraph 4 of the ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit already extended to the borrower, provided such action is in accordance with both Federal and state laws, rules and regulations, and further provided all interest due at the time of such renewal or extension is collected in cash from the borrower.

   [.5] 5. Within 120 days from the effective date of this ORDER, the Bank shall correct the cited deficiencies in the assets listed for "Special Mention" on page 2-c of the FDIC's Report of Examination of the Bank as of August 16, 1990. Thereafter, the Bank shall service these loans in accordance with its written loan policy and in accordance with safe and sound banking practices.

   [.6] 6. (a) Within 60 days from the effective date of this ORDER, the Bank shall review and revise its written loan policy, and the board of directors shall approve the revised written loan policy and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall implement and follow the written loan policy and/or any subsequent modification thereto.
   (b) The Bank's written loan policy, as revised, shall include, but not necessarily be limited to, the following:

       (i) The establishment of an effective internal loan review and grading system, which identifies those loans warranting special attention for reasons relating to their ultimate collectibility, and, at a minimum, provides for:
         (A) An identification or grouping of loans that warrant the special attention of management;
         (B) For each loan identified pursuant to subparagraph 6(i)(A), a written statement of the reason(s) why the particular loan merits special attention; and
         (C) A mechanism for reporting periodically to the board of directors on the status of each loan identified pursuant to subparagraph 6(i)(A), and the action(s) taken by management thereon;
       (ii) The maintenance and review of complete and current credit files on each borrower;
       (iii) Appropriate and adequate collection procedures, including, but not limited to, the action to be taken against borrowers who fail to make timely payments;
       (iv) Specific policies governing charge-offs;
       (v) A requirement providing for written documentation of the borrower's ability to repay each extension of credit or renewal thereof and the establishment of a written repayment plan for each loan which takes into consideration the source of repayment; and
       (vi) A prohibition against:
         (A) The addition of uncollected interest to the unpaid principal balance of any loan on which such interest is due;
         (B) The extension of credit by means of a separate note for uncollected interest due on any loan unless the new extension is supported by additional tangible collateral which adequately and completely secures the loan;
{{5-31-91 p.C-869}}
       (C) Continuing to accrue interest on any loan that is, or becomes, 90 days or more delinquent in principal or interest unless the loan is both well secured and in the process of collection; and
       (D) Any other device that essentially avoids recognition of overdue loans and/or artificially inflates the income of the Bank.

   [.7] 7. (a) Within 30 days from the effective date of this ORDER, and in accordance with the Instructions for the Reports of Condition and Income, the Bank shall reverse on its books all accrued and unpaid interest on any loan that is 90 days or more delinquent in principal or interest payments and is not both well secured and in the process of collection.
   (b) Effective the date of this ORDER, the Bank shall not: (i) accrue interest on any loan that is, or becomes, 90 days or more delinquent in principal or interest payments unless the loan is both well secured and in the process of collection; (ii) add uncollected interest to the unpaid principal balance of any loan on which interest is due unless such addition is supported by additional tangible collateral which adequately and completely secures the loan; (iii) extend credit by means of a new note for uncollected interest due on any loan unless such new extension of credit is supported by additional tangible collateral which adequately and completely secures the loan; or (iv) book uncollected interest by any other means in contravention of the Instructions for Reports of Condition and Income.
   (c) For purposes of paragraphs 6(b)(vi) and 7 of this ORDER, "well secured" and "in the process of collection" shall have the same meaning as those terms have in the prevailing Instructions for the Reports of Condition and Income.

   [.8] 8. (a) Within 60 days from the effective date of this ORDER, the Bank shall revise its written funds management policy to include, at a minimum:

       (i) An assessment of the Bank's liquidity needs and plans for insuring that such needs are met on an ongoing basis;
       (ii) Goals and strategies for managing and reducing the Bank's dependence on volatile liabilities to fund longterm assets; and
       (iii) Monthly monitoring by the Bank's board of directors of the Bank's performance in meeting the needs and goals established pursuant to subparagraphs 8(a)(i) and (ii) of this ORDER.
   (b) The board of directors shall promptly approve the revisions to the written funds management policy and any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written funds management policy and/ or any subsequent modification thereto, and shall report its funds management performance to the Regional Director and the Comptroller concurrently with the other reporting requirements specified in paragraph 15 of this ORDER.

   [.9] 9. (a) Within 30 days from the effective date of this ORDER, the Bank shall prepare a realistic and comprehensive budget and earnings forecast for calendar year 1991 and shall submit this budget and earnings forecast to the Regional Director and the Comptroller for review and comment. Furthermore, beginning on January 1, 1992, the Bank shall prepare realistic and comprehensive calendar year budgets and earnings forecasts on a consolidated basis as of January 1 of each year and shall submit them to the Regional Director and the Comptroller for review and comment no later than January 31 of the budget year for as long as this ORDER remains in effect.
   (b) In preparing the budgets and earnings forecasts required by paragraph 9(a) of this ORDER, the Bank shall, at a minimum:

       (i) Identify the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance; and
       (ii) Describe the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (c) Progress reports comparing the Bank's actual income and expense performance with budgetary projections shall be submitted to the Regional Director and the Comptroller concurrently with the {{5-31-91 p.C-870}}other reporting requirements set forth in paragraph 15 of this ORDER. The Bank's board of directors shall review such progress reports, which review shall be recorded in the minutes of the board of directors.

   [.10] 10. (a) Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter continually maintain an adequate allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income, by charges against current operating income. In complying with the requirements of this paragraph 10(a), the Bank's board of directors shall, as a minimum, review the adequacy of the Bank's allowance for loan and lease losses prior to the end of each calendar quarter. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of any recommended increases in the allowance, and the basis for determining the amount of allowance provided.
   (b) Reports of Condition and Income required to be filed by the Bank prior to the effective date of this ORDER and subsequent to August 16, 1990, shall reflect a provision for the allowance for loan and lease losses necessary to comply with paragraph 10(a) of this ORDER. If necessary to comply with this paragraph 10(b), the Bank shall file amended Reports of Condition and Income within 30 days from the effective date of this ORDER.

   [.11] 11. Effective the date of this ORDER, the Bank shall not pay any cash or property dividends without the prior written consent of the Regional Director and the Comptroller.

   [.12] 12. Within 30 days from the effective date of this ORDER, the Bank shall take all necessary steps, consistent with sound banking practices, to eliminate and/or correct all violations of law and regulations committed by the Bank, as described on pages 6-b through 6-b-3 of the FDIC's Report of Examination of the Bank as of August 16, 1990. In addition, the Bank shall adopt appropriate procedures to ensure its future compliance with all applicable laws and regulations.

   [.13] 13. Within 120 days from the effective date of this ORDER, the Bank shall correct the internal routine and control deficiencies described on page 6-c of the FDIC's Report of Examination of the Bank as of August 16, 1990.

   [.14] 14. Following 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 this 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, and to the Comptroller, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC or the Comptroller shall be made prior to dissemination of the description, communication, notice, or statement.

   [.15] 15. Within 90 days from the effective date of this ORDER, and every 90 days thereafter, unless and until each and every corrective action required by this ORDER has been accomplished, the Bank shall furnish written progress reports to the Regional Director and the Comptroller 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 Comptroller have released the Bank in writing from making further reports. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the appropriate board meeting.
   16. The provisions of this ORDER shall become effective ten (10) days from the date of its issuance and shall be binding upon the Bank and its institution-affiliated parties. Further, 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 at Atlanta, Georgia, this 14th day of March, 1991.

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