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FDIC Enforcement Decisions and Orders

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{{8-31-94 p.C-1424}}
   [10,329] In the Matter of Cobb American Bank & Trust Company, Marietta, Georgia, Docket No. FDIC-91-278b (9-11-91).

   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; and operating with inadequate allowance for loan and lease losses. (This order was terminated by order of the FDIC dated 6-14-94; see ¶ 15,877.)

{{11-30-91 p.C-1425}}
   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Loans—Documentation—Analysis Required
   [.7] Loan Policy—Written Revision—Minimum Requirements
   [.8] Loans—Concentrations of Credit—Reduction Plan
   [.9] Budget and Earnings Forecast—Preparation Required
   [.10] Dividends—Restricted
   [.11] Shareholders—Disclosure—Cease and Desist Order
   [.12] Compliance Reports—Frequency

In the Matter of

COBB AMERICAN BANK & TRUST
COMPANY

MARIETTA, GEORGIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Cobb American Bank & Trust Company, Marietta, Georgia ("Bank"), having been advised of its right to a written Notice of Charges and of Hearing detailing unsafe or unsound banking practices 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 August 29, 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, 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. 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:
   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;
   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, past due loans, and nonearning assets;
   D. Engaging in hazardous lending and ineffective and lax collection practices, including but not limited to: (i) failing to establish and/or enforce repayment programs; (ii) extending credit to borrowers with inadequate repayment ability; (iii) extending credit which has inadequate or deficient supporting loan documentation, including current financial statements and cash flow and/or operating information; and (iv) failing adequately to diversify credit risks and maintaining an excessive volume of real estate acquisition, development and construction loans;
   E. Engaging in practices which produce inadequate operating income and excessive loan losses; and
   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.
   IT IS FURTHER ORDERED that the Bank, its institution-affiliated parties, and
{{11-30-91 p.C-1426}}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 board of directors which shall be responsible for supervising and directing the policies and activities of the Bank; a chief executive officer who shall posses the necessary experience and qualifications to provide daily supervision over the Bank's affairs; a senior lending officer with an appropriate level of lending, collection and loan supervision experience necessary to supervise the upgrading of a low quality loan portfolio; and a senior operations officer who has sufficient experience and qualifications to oversee and manage the operational functions of the Bank. 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. As 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 Georgia Commissioner of Banking and Finance ("Commissioner") 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 with the Bank.

[.2] 2. (a) Within 30 days from the effective date of this ORDER, and within 30 days after the end of each calendar quarter 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 March 31, June 30, September 30 or December 31 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 March 31, June 30, September 30 or December 31 data. Any such increase in Tier 1 capital required by this paragraph 2(a) of the ORDER 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 the assets classified "Loss" or "Doubtful" as of February 13, 1991, and charged off in accordance with paragraph 4 of this ORDER;
       (iii) The direct contribution of cash by the directors and/or shareholder 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 Commissioner.
   (b) (1) If all or part of the increase in the Bank's Tier 1 capital required under paragraph 2(a) of this ORDER is accomplished by the sale of new securities, the board of directors shall take all necessary steps to 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 Bank's securities (including a distribution limited to the Bank's existing shareholder), the Bank shall prepared 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 Section, Washington, D.C. 20429, and to the Commissioner for review. Any changes in such offering materials requested by the
{{11-30-91 p.C-1427}}FDIC or the Commissioner shall be made prior to their dissemination.
   (2) In complying with the provisions of paragraph 2(b)(1) of this ORDER, the Bank shall provide to any subscriber 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)(2) of the ORDER 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) In addition to the requirements of paragraph 2(a) of this ORDER, for as long as this ORDER remains in effect, the Bank shall meet the minimum ratio requirements established for "risk-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 Risk-Based Capital," and/or any subsequent amendments or modifications thereto.
   (d) For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in section 325.2(m) and 325.2(n), respectively, of the FDIC's Rules and Regulations, 56 Fed. Reg. 10161 (March 11, 1991) (to be codified at 12 C.F.R. §§ 325.2(m) and 325.2(n)), effective April 10, 1991.

[.3] 3. (a) Within 30 days from the effective date of this ORDER, and concurrently with the requirements of paragraph 4 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 the Instructions for the Reports of Condition and Income, by charges against current operating income. In complying with the requirements of this paragraph 3(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. Such allowance shall, at a minimum, comply with the minimum guidelines established by the Commissioner, which require state-chartered banks in Georgia to maintain an allowance for loan and lease losses at a level of at least: (i) 100 percent of all loans or portions of loans classified "Loss" at the most recent regulatory examination of the Bank, plus (ii) 50 percent of all loans or portions of loans classified "Doubtful" at such examination, plus (iii) 10 percent of all loans or portions of loans classified "Substandard" at such examination. In addition to the Commissioner's minimum guidelines, the Bank's board of directors shall consider the volume and quality of internally rated loans, the level of delinquent and nonaccrual loans, risk in loans listed for Special Mention and anticipated growth in the loan portfolio in determining the adequacy of its allowance. 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 February 13, 1991, shall reflect a provision for the allowance for loan and lease losses necessary to comply with paragraph 3(a) of this ORDER. If necessary to comply with paragraph 3(a) of this ORDER, the Bank shall file amended Reports of Condition and Income within 30 days from the effective date of this ORDER.

   [.4] 4. 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 results of the FDIC's Report of Examination of the Bank as of February 13, 1991, which have not been previously collected or charged
{{11-30-91 p.C-1428}}off, unless otherwise approved in writing by the Regional Director and the Commissioner. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph 4 of the ORDER.
   5. (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 February 13, 1991, to not more than $8,750,000; with in 360 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $5,250,000; within 540 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $2,750,000; and within 720 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $2,000,000. The requirements of this paragraph 5(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 Commissioner a written plan of action to reduce each asset which was adversely classified by the FDIC as of February 13, 1991, and which aggregated $200,000 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 Commissioner at 90-day intervals concurrently with the other reporting requirements set forth in paragraph 13 of this ORDER.
   (c) As used in this paragraph 5 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] 6. (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 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: (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 5(b) of this ORDER as to such borrower; (iii) determines that the extension of credit is in full compliance with the Bank's loan policy; (iv) determines that all necessary loan documentation is on file, including but not limited to, current financial and cash flow information and satisfactory appraisal, title and lien documents; and (v) approves such advance. A written record of the board of directors' determination and approval of any advance under this paragraph 6(b) of the ORDER 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 6 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] 7. Effective the date of this ORDER, the Bank shall not extend any credit, whether secured or unsecured, without first obtaining and analyzing credit information sufficient to identify the borrower's source of funds to repay the debt and support the scheduled repayment plan. In addition, effective the date of this ORDER, the Bank shall not extend or renew any credit without establishing specific repayment terms, and shall not extend or renew any secured credit until all required collateral documentation, or evidence thereof, has been obtained and reviewed by a loan officer or by the board of directors' loan committee.

[.7] 8. (a) Within 60 days from the effective date of this ORDER, the Bank shall review and revise its written loan policy. The Bank's written loan policy, as re- {{1-31-95 p.C-1429}}vised, shall include, but not necessarily be limited to, the following:

       (i) Appropriate and adequate collection procedures, including, but not limited to, the action to be taken against borrowers who fail to make timely payments;
       (ii) Guidelines for establishing specific repayment terms of all extensions of credit of renewals thereof;
       (iii) The establishment of a loan review and grading system which, 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 8(a)(iii)(A), a written statement of the reasons(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 8(a)(iii)(A), and the action(s) taken by management thereon; and
       (iv) Appropriate limitations on extensions of credit for the purposes of real estate acquisition, development and/or construction.
   (b) The revised written loan policy 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 and the Commissioner, the board of directors shall approve the 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.

   [.8] 9. Within 30 days from the effective date of this ORDER, the Bank shall develop and submit to the Regional Director and the Commissioner for review and comment a written plan of action to reduce the Bank's concentration of credit in the area of real estate acquisition, development and construction. No more than 30 days after the receipt of any comment from the Regional Director and the Commissioner, the board of directors shall approve the written plan of action 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 plan of action and/or any subsequent modification thereto.

[.9] 10. (a) Within 30 days from the effective date of this ORDER, the Bank shall prepare a realistic and comprehensive budget and earnings forecast for July 1-December 31, 1991, and shall submit this budget and earnings forecast to the Regional Director and the Commissioner 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 Commissioner 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 10(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, project the actions that must be taken to achieve a net operating profit, and establish a deadline for achieving such goal;
       (ii) Adopt plans for reducing overhead expenses and increasing the Bank's net interest margin;
       (iii) Identify all employee salaries, bonuses, and other means of compensation, and require that the board of directors periodically evaluate such payments to ensure that they are reasonable and justified in relation to the services performed by employees for the Bank; and
       (iv) 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
{{1-31-95 p.C-1430}}submitted to the Regional Director and the Commissioner concurrently with the other reporting requirements set forth in paragraph 13 of this ORDER. The Bank's board of directors shall review such progress reports monthly, which review shall be recorded in the minutes of the board of directors.

   [.10] 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 Commissioner.

   [.11] 12. Following the effective date of this ORDER, the Bank shall send to its shareholder 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 Section, Washington, D.C. 20429, and to the Commissioner, for review at least twenty (20) days prior to dissemination to the shareholder. Any changes requested to be made by the FDIC or the Commissioner shall be made prior to dissemination of the description, communication, notice, or statement.

   [.12] 13. 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 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 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.
   14. 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.
   Dated at Atlanta, Georgia, this 11th day of September, 1991.
   ursuant to delegated authority.

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