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FDIC Enforcement Decisions and Orders

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{{11-30-93 p.C-1201}}
   [10,282] In the Matter of Apalachicola State Bank, Apalachicola, Florida, Docket No. FDIC-91-209b (7-22-91).

   Bank to cease and desist from such unsafe or unsound practices as failing to provide adequate supervision over the Bank's affairs; operating with management whose policies are detrimental to the Bank; operating with excessive volumes of adversely classified assets; following hazardous lending and lax collection practices; engaging in practices which produce inadequate operating income; operating with inadequate allowance for loan and lease losses; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 9-1-93; see ¶ 15,727.)

   [.1] Management—Qualifications—Review
   [.2] Allowance for Loan and Lease Losses—Establish/Maintain
   [.3] Assets—Adversely Classified—Eliminate
   [.4] Assets—Adversely Classified—Reduce—Written Plan Required
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Loans—Overdue—Accrual of Interest
   [.7] Budget and Earnings Forecast—Preparation Required
   [.8] Dividends—Restricted
   [.9] Violations of Law—Eliminate/Correct
   [.10] Loans—Extensions of Credit—Documentation System Required
   [.11] Loan Policy—Written Revision—Minimum Requirements
   [.12] Interest Rates—Risk Exposure—Written Policy Required
   [.13] Shareholders—Disclosure—Cease and Desist Order
   [.14] Compliance Reports—Frequency

{{11-30-93 p.C-1202}}
In the Matter of

APALACHICOLA STATE BANK
APALACHICOLA, FLORIDA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Apalachicola State Bank, Apalachicola, 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 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 ("Act"), 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 a representative of the Legal Division of the Federal Deposit Insurance Corporation ("FDIC"), dated July 16, 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 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 regulations.
   The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST
   IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as such term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and its successors and assigns cease and desist from the following unsafe or unsound banking practices and violations of 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 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 an excessive volume of adversely classified assets;
   D. Engaging in hazardous lending and ineffective and lax collection practices, including but not limited to: (i) extending credit with deficient or inadequate loan documentation to support the extension of credit, including but not limited to current financial statements, insurance coverage, title searches or legal opinions, current objective appraisals of collateral, and cash flow and/or operating information; (ii) failing to establish and/or enforce repayment programs; (iii) capitalizing unpaid accrued interest into the principal note balances of delinquent extensions of credit; and (iv) failing to take adequate collection action against seriously delinquent borrowers;
   E. Engaging in practices which produce inadequate operating income and excessive loan losses;
   F. Failing to provide and maintain an adequate allowance for loan and lease losses for the volume, kind and quality of loans held by the Bank; and
   G. Engaging in violations of applicable Federal regulations, as more fully described on page 6-a of the FDIC's Report of Examination of the Bank as of January 29, 1991.
   IT IS FURTHER ORDERED that the Bank, its institution-affiliated parties, and its successors and assigns take affirmative action as follows:

   [.1] 1. 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. 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 changes in management. Such {{9-30-91 p.C-1203}}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 30 days prior to the individual assuming the new position.

   [.2] 2. (a) Within 30 days from the effective date of this ORDER, and concurrently with compliance with the requirements of paragraph 3 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 2(a) of the ORDER, the Bank's board of directors shall, at 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 January 29, 1991, shall reflect a provision for the allowance for loan and lease losses necessary to comply with paragraph 2(a) of this ORDER. If necessary to comply with this paragraph 2(b) of the ORDER, the Bank shall file amended Reports of Condition and Income within 30 days from the effective date of this ORDER.

   [.3] 3. Within 30 days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection, charge-off or other proper entries, all assets or portions of assets classified "Loss" and one-half of all assets or portions of assets classified "Doubtful" by the FDIC as a result of its examination of the Bank as of January 29, 1991, which have not been previously collected or charged off, unless otherwise approved in writing by the Regional Director and the Comptroller. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph 3 of the ORDER.

   [.4] 4. (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 January 29, 1991, to not more than $1,800,000; within 360 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $1,300,000; within 540 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $900,000; and within 720 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 4(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 January 29, 1991, and which aggregated $100,000 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 14 of this ORDER.
   (c) As used in this paragraph 4 of the ORDER, "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.

   [.5] 5. (a) 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 charged off or classified, in whole or in part, "Loss" or "Doubtful", and is uncollected.
   (b) Effective the debt 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 {{9-30-91 p.C-1204}}that has been classified, in whole or in part, "Substandard", and is uncollected, unless 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 4(b) of this ORDER as to such borrowers, and (iii) approves such advance. A written record of the board of directors' determination and approval of any advance under this paragraph 5(b) of the ORDER shall be maintained in the credit file(s) of the affected borrower(s) as well as the minuted of the board of directors.
   (c) The requirements of this paragraph 5 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.

   [.6] 6. (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 extensions 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 this paragraph 6 of the ORDER, "well secured" and "in the process of collection" shall have the same meanings as those terms have in the prevailing Instructions for the Reports of Condition and Income.

   [.7] 7. (a) Within 60 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.
   (b) As long as this ORDER remains in effect, the Bank shall prepare realistic and comprehensive calendar year budgets and earnings forecasts on a consolidated basis as of January 1 of each subsequent 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.
   (c) In preparing the budgets and earnings forecasts required by this paragraph 7 of the 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.
   (d) 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 other reporting requirements set forth in paragraph 14 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.

   [.8] 8. As of the effective date of this ORDER, the Bank shall not pay any cash dividends without the prior written consent of the Regional Director and the Comptroller.

   [.9] 9. 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 regulations committed by the Bank, as described on page 6-a of the FDIC's Report of Examination of the Bank as of January 29, 1991. In addition, the Bank shall adopt appropriate procedures to ensure its {{10-31-92 p.C-1205}}future compliance with all applicable laws and regulations.

   [.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall establish an effective system of loan documentation and shall correct the technical exceptions on loans noted on page 2-d of the FDIC's Report of Examination of the Bank as of January 29, 1991. In addition and as long as this ORDER remains in effect, the Bank shall ensure that all necessary loan documentation, or evidence thereof, is obtained and evaluated before any further credit is extended by the Bank.

   [.11] 11. (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 identified 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 11(b)(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 11(b)(i)(A), and on the action(s) taken or planned by management to improve the quality of each such loan;
       (ii) The maintenance and review of complete and current credit files on each borrower, including the establishment of specific criteria and guidelines for borrower financial statements;
       (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;
       (vi) Specific guidelines governing the administration and disposition of "other real estate" assets; and
       (vii) Specific criteria and guidelines governing extensions of credit to the Bank's executive officers, directors, principal shareholders, and their related interests, and prohibiting conflicts of interest in such extensions.

   [.12] 12. (a) Within 60 days from the effective date of this ORDER, the Bank shall develop a written policy addressing the Bank's interest rate risk exposure at various time horizons. The policy shall, at a minimum, establish target ratios of rate sensitive assets to rate sensitive liabilities and rate sensitive assets less rate sensitive liabilities to total assets, and shall require the board of directors periodically to monitor the Bank's interest rate risk exposures. The written policy shall define the terms "rate sensitive assets" and "rate sensitive liabilities."
   (b) The written policy described in paragraph 12(a) and any subsequent modification thereto shall be submitted to the Regional Director and the Comptroller for review and comment. No more than 30 days after the receipt of any comment from the Regional Director and the Comptroller, the board of directors shall approve such written 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 such written policy and/or any subsequent modification thereto.

   [.13] 13. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of {{10-31-92 p.C-1206}}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.

   [.14] 14. Within 90 days from the effective date of this ORDER, and every 90 days thereafter, 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.
   15. The provisions of this ORDER shall become effective ten (10) days from the date of its issuance and shall be binding upon the Bank, its institution-affiliated parties, and its successors and assigns. 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 22nd day of July, 1991.

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