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FDIC Enforcement Decisions and Orders

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{{1-31-95 p.C-1430}}
   [10,330] In the Matter of Farmers & Merchants Bank, Eatonton, Georgia, Docket No. FDIC-91-282b (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; operating with inadequate allowance for loan and lease losses; operating with excessive personnel overhead expenses; operating with inadequate routine and controls policies; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 11-10-94; see ¶ 15,933.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Allowance for Loan and Lease Losses—Establish/Maintain
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Loans—Extensions of Credit—Repayment Plans Required
   [.7] Loans—Overdue—Accrual of Interest
   [.8] Loan Policy—Written Revision—Minimum Requirements
   [.9] Loans—Overdue—Ratio—Reduction Required
   [.10] Violations of Law—Eliminate/Correct
{{11-30-91 p.C-1431}}
   [.11] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.12] Technical Exceptions—Correct/Eliminate
   [.13] Dividends—Restricted
   [.14] Bank Holding Company—Fees Paid—Restrictions
   [.15] Investment Policy—Revision—Minimum Requirements
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Compliance Reports—Frequency

In the Matter of

FARMERS & MERCHANTS BANK
EATONTON, GEORGIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Farmers & Merchants Bank, Eatonton, Georgia ("Bank"), having been advised of its rights 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 ("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 September 11, 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, 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 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 an excessive volume of adversely classified assets and past due loans;
   D. Operating the Bank with an excessive volume of nonearning assets;
   E. Engaging in effective and lax lending and collection practices, including but not limited to: (i) failing to provide an adequate loan policy for the Bank, and (ii) extending credit which has inadequate or deficient supporting loan documentation, including current financial statements and cash flow and/ or operating information;
   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;
   G. Operating with excessive personnel overhead expenses;
   H. Failing to operate with an adequate system of internal routine and controls, including but not limited to: (i) failing to reconcile subsidiary records to the general ledger, (ii) failing to prepare Reports of Condition and Income in accordance with the instructions for their preparation, and (iii) failing adequately to define and segregate duties of Bank personnel; and
   I. Engaging in cited violations of applicable Federal and state laws and regulations, as more fully described on pages 6-a
{{11-30-91 p.C-1432}}through 6-a-4 of the FDIC's Report of Examination of the Bank as of October 29, 1990.
   IT IS FURTHER ORDERED that the Bank and its successors and assigns 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 board of directors which shall be responsible for supervising and directing the policies and activities of the Bank; a chief executive officer who shall possess the necessary experience and qualifications to provide daily supervision over the bank's affairs; a senior lending officer who has 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 operations function 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 all applicable laws and regulations, and (iv) maintain all aspects of the Bank in, or if necessary to 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 Georgia Commissioner of Banking and Finance ("Commissioner") in writing of any proposed changes in the management of the Bank. 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 and 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.
   (b) Within 60 days from the effective date of this ORDER, the Bank's board of directors shall review all employee salaries, bonuses, and other means of compensation to determine that they constitute reasonable payment for services performed for the Bank. A written report of the board of directors' findings, including any proposed changes in compensation, shall be sent 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 or the Commissioner, the board of directors shall approve the written report and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its successors and assigns shall implement and follow the written plan and/or any subsequent modification thereto.

[.2] 2. (a) Within 30 days from the effective date of this Order and within 30 days after each June 30 and December 31 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 June 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 is not less than 6.0 percent as of the nearest preceding June 30 or December 31 date.
   (b) 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.
   (c) For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in sections 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. Within 30 days from the effective
{{11-30-91 p.C-1433}}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 October 29, 1990, which have not been previously collected or charged 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 3 of the ORDER.

       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 October 29, 1990, to not more than $4,900,000; within 360 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $3,300,000; within 540 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $2,300,000; and within 720 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $1,300,000. 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 Commissioner a written plan of action to reduce each line of credit which was adversely classified by the FDIC as of October 29, 1990, 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 18 of this ORDER.
       (c) As used in this paragraph 4 of the ORDER, the word "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] 5. Within 30 days from the effective date of this ORDER, and concurrently 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 5 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 the review of the allowance 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.

[.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
{{11-30-91 p.C-1434}}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 borrower, and (iii) 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 reasonably 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) By no later than the September 30 Report of Condition and Income, 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 new 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 8 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.

[.8] 9. (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 revised, shall include, but not necessarily be limited to, the following:

       (i) Guidelines under which unsecured extensions of credit will be granted, including a requirement that current financial statements evidencing the borrower's ability to repay the debt be obtained and analyzed prior to extending unsecured credit:
       (ii) A well-defined and effective appraisal program which complies with Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323;
       (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) Appropriate limitations on extensions of credit through overdrafts, including the legal limitations on overdrafts or executive officers and directors established by Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215;
       (v) Guidelines for servicing account receivable financing, which include maintenance of current credit information on specific dealers and aging reports for receivables;
       (vi) Guidelines for obtaining and reviewing required collateral documentation and for establishing specific repay- {{7-31-92 p.C-1435}}ment terms on all extensions of credit or renewals thereof;
       (vii) 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 9(a)(vii)(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 9(a)(vii)(A), and the action(s) taken by management thereon; and
       (viii) Guidelines to prevent a conflict of interest or the appearance of a conflict of interest by the Bank's management in the extension and/or servicing of any credit.
   (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 successors and assigns shall implement and follow the written loan policy and/or any subsequent modification thereto.

   [.9] 10. Within 90 days from the effective date of this ORDER, the Bank's board of directors shall submit to the Regional Director and the Commissioner for review and comment a written plan of action to reduce the aggregate dollar volume of delinquent loans to no more than 4.0 percent of the Bank's total loans. Such plan to action shall, at a minimum, establish definitive procedures for monitoring and servicing past due loans, including routine board review of delinquent credits in excess of $25,000, and clearly defined collection procedures in conformance with the Bank's revised loan policy. Such plan of action shall thereafter be implemented by the Bank and monitored and a summary of each month's collection efforts and the results thereof shall be included in the minutes of the board of directors.

   [.10] 11. Within 60 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-a through 6-a-4 of the FDIC's Report of Examination of the Bank as of October 29, 1990. In addition, the Bank shall adopt appropriate procedures to ensure its future compliance with all applicable laws and regulations.

[.11] 12. (a) Within 90 days from the effective date of this ORDER, the Bank's board of directors shall prepare and submit to the Regional Director and the Commissioner for review and comment a written report addressing all internal routine and control deficiencies cited in the FDIC's Report of Examination of the Bank as of October 29, 1990, and in the most recent external audit of the Bank.
   (b) Within 90 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 comprehensive internal audit program. No more than 30 days after the receipt of any comments from the Regional Director and the Commissioner, the board of directors shall approve the written internal audit program and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its successors and assigns shall implement and follow the internal audit program and/or any subsequent modification thereto.

   [.12] 13. 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-e of the FDIC's Report of Examination of the Bank as of October 29, 1990. In addition, and as long as this ORDER remains in effect, the Bank shall obtain and evaluate all necessary loan documentation, or evidence thereof, before any further credit is extended by the Bank.

   [.13] 14. Effective the date of this OR- {{7-31-92 p.C-1436}}DER, the Bank shall not pay any cash or property dividends without the prior written consent of the Regional Director and the Commissioner.

   [.14] 15. Effective the date of this ORDER, the Bank shall not pay any management fees to its parent holding company unless a formal written agreement between the Bank and its parent holding company is executed detailing the services to be received by the Bank from the holding company and the method of determining the basis for payment of fees by the Bank. Any fees to be paid by the Bank pursuant to such written agreement shall not exceed a commercially reasonable amount which is comparable to fees charged by unaffiliated parties for substantially similar services. Any written agreement prepared pursuant to this paragraph 15 of the ORDER shall be submitted to the Regional Director and the Commissioner for review and comment prior to its execution.

   [.15] 16. Within 60 days from the effective date of this ORDER, the Bank shall submit a written investment policy consisting of goals and strategies for the Bank's investments to the Regional Director and the Commissioner for review and comment. The policy shall address, at a minimum, the desired liquidity, marketability, income, quality, maturity, and diversification of the Bank's investments. 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 investment 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 successors and assigns shall implement and follow the written investment policy and/or any subsequent modification thereto.

   [.16] 17. Following the effective date of this ORDER, the Bank shall send to its shareholder(s) or otherwise furnish a description of this ORDER (a) in conjunction with the Bank's next shareholder communication and also (b) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall 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 Commissioner, for review at least 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.

   [.17] 18. 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.
   19. 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 successors and assigns. Furthermore, 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.
   Pursuant to delegated authority.

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