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FDIC Enforcement Decisions and Orders

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{{11-30-93 p.C-1530}}
   [10,348] In the Matter of Deerbrook State Bank, Deerfield, Illinois, Docket No. FDIC-91-305b (10-2-91).

   Bank to cease and desist from such unsafe or unsound practices as following hazardous lending and lax collection practices; operating with inadequate capital; operating in violation of applicable laws or regulations; operating with excessive volumes of adversely classified assets; operating with excessive occupancy costs and inadequate net interest income; operating with inadequate internal controls; operating with inadequate allowance for loan and lease losses; operating with management whose policies are detrimental to the Bank; and failing to provide adequate supervision over the Bank's affairs. (This order was terminated by order of the FDIC dated 9-14-93; see ¶ 15,731.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Dividends—Restricted
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Allowance for Loan and Lease Losses—Establish/Maintain
   [.6] Loans—Risk Position—Reduce—Written Plan Required
   [.7] Loan Policy—Written Revision—Minimum Requirements
   [.8] Profit Plan—Minimum Requirements
   [.9] Real Estate Activities—Written Policy Required
   [.10] Real Estate—Appraisal Policy Required
   [.11] Violation of Law—Eliminate/Correct
   [.12] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.13] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.14] Shareholders—Disclosure—Cease and Desist Order
   [.15] Compliance Reports—Frequency

In the Matter of

DEERBROOK STATE BANK
DEERFIELD, ILLINOIS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-91-305b

   Deerbrook State Bank, Deerfield, Illinois ("Bank"), having been advised of its right to a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices and violations of law and regulation alleged to have been committed
{{12-31-91 p.C-1531}}by the Bank, and of its right to a hearing on the charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated September 25, 1991, whereby, solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices and violations of law and regulation, 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 has engaged in unsafe or unsound banking practices and has violated 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 that 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 unsafe or unsound banking practices and violations of law and regulation listed below:
   A. Engaging in hazardous lending and lax collection practices;
   B. Operating with an inadequate level of capital for the kind and quality of assets held;
   C. Violating the more than normal risk of repayment or unfavorable features prohibition of section 215.4(a) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. § 215.4(a); the overdraft provisions of section 215.4(d) of Regulation O, 12 C.F.R. § 215.4(d); and the disclosure of information restrictions of section 309.6(c)(7) of the FDIC's Rules and Regulations, 12 C.F.R. § 309.6(c)(7);
   D. Operating with an excessive level of classified assets;
   E. Operating with excessive occupancy costs and inadequate net interest income which have resulted in operating losses;
   F. Operating with inadequate internal controls, including failure to segregate duties of Bank personnel;
   G. Operating with an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans held;
   H. Operating with a management whose policies and practices are detrimental to the Bank and which jeopardize the safety of its deposits; and
   I. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management of the Bank.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, 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 thereafter retain, qualified management. At a minimum, such management shall include a new senior lending officer with an appropriate level of lending, collection and loan supervision experience for the type and quality of the Bank's loan portfolio. Such person 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 effective internal controls.
   (b) During the life of this ORDER, the Bank shall promptly notify the Regional Director of the Chicago Regional Office of the FDIC ("Regional Director") in writing of any changes in any of the Bank's management. For purposes of this paragraph, "management" is defined as members of the board of directors and "senior executive officers" as that term is defined in section 32 of the Act ("section 32"), 12 U.S.C. § 1831(i), and section 303.14 of the FDIC's Rules and Regulations ("section 303.14"), 12 C.F.R. § 303.14.
{{12-31-91 p.C-1532}}Prior to the addition of any individual to the board of directors or the employment of any individual as a senior executive officer, the Bank shall comply with the requirements of section 32 and section 303.14.

   [.2] 2. (a) Within 180 days from the effective date of this ORDER, the Bank shall increase its Tier I capital by not less than $435,000.
   (b) Within 30 days of each March 31, June 30, September 30 and December 31 following the date of required compliance with paragraph 2(a) of this ORDER, the Bank shall determine its level of Tier I Capital as a percentage of its Total Assets and its level of Total Capital as a percentage of its Total Assets ("Tier 1 Capital ratio and Total Capital ratio") for that calendar quarter. If the Tier 1 Capital ratio is less than 6.5 percent, the Bank shall, within 60 days of the date of the required determination, increase its Tier 1 Capital ratio to not less than 6.5 percent, calculated as of the end of the preceding quarterly period. If the Total Capital ratio is less than 8.0 percent, the Bank shall within 60 days of the date of the required determination, increase its Total Capital ratio to not less than 8.0 percent, calculated as of the end of the preceding quarterly period. For purposes of this ORDER, Tier I Capital, Total Capital and Total Assets shall be calculated in accordance with Part 325 of the FDIC's Rules and Regulations ("Part 325"), 12 C.F.R. Part 325, and all appendices thereto.
   (c) Any such increase in Total Capital necessary to meet the requirements of this paragraph may be accomplished by the following:

       (i) The sale of securities constituting Total Capital under Appendix A of Part 325; or
       (ii) The elimination of all or part of the assets classified "Loss" as of April 20, 1991, without loss or liability to the Bank, provided any such collection on a partially charged-off asset shall first be applied to that portion of the asset which was not charged off pursuant to this ORDER; or
       (iii) The collection in cash of assets previously charged off; or
       (iv) The direct contribution of cash by the directors and/or the shareholders of the Bank; or
       (v) Any other means acceptable to the Regional Director; or
       (vi) Any combination of the above means.
   (d) If all or part of the increase in capital required by this paragraph is to be accomplished by the sale of new securities, the board of directors of the Bank shall adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held by or controlled by them in favor of said plan. Should the implementation of the plan involve public distribution of the Bank Securities, including a distribution limited only 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 the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation for the plan and, in any event, not less than 20 days prior to the dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC at Washington, D.C., for its review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (e) In complying with the provisions of paragraph 2(d) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank Securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of the Bank Securities. The written notice required by this paragraph shall be furnished within 10 calendar days of the date any material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of the Bank Securities who received or was tendered the information contained in the Bank's original offering materials.
   (f) The capital ratio analysis required by paragraph 2(b) shall not negate the responsibility of the Bank and its board of directors for maintaining throughout the year an adequate level of capital protec- {{12-31-91 p.C-1533}}tion for the kind, quality and degree of market depreciation of assets held by the Bank.

   [.3] 3. As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend without the prior written consent of the Regional Director.

   [.4] 4. As of the effective date of this ORDER, the Bank shall eliminate from its books by charge-off or collection, all assets or portions of assets classified "Loss" as of April 20, 1991, that have not been previously collected or charged off. Elimination or reduction of these assets with the proceeds of other Bank extensions of credit is not considered collection for the purpose of this paragraph.

[.5] 5. (a) Within 30 days from the effective date of this ORDER, the Bank shall replenish its allowance for loan and lease losses ("ALLL") by an expense entry in an amount equal to those loans required to be charged off by this ORDER.
   (b) Within 45 days from the effective date of this ORDER, the Bank shall make an additional provision for loan and lease losses which, after review and consideration by the board of directors, reflects the potential for further losses in the remaining loans or leases classified "Substandard" and all other loans and leases in its portfolio. At a minimum, the ALLL shall at all times equal at least 2.5 percent of total loans.
   (c) Within 45 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to April 20, 1991, shall be amended and refiled if they do not reflect a provision for loan losses and an ALLL which are adequate considering the condition of the Bank's loan portfolio, and which, at a minimum, incorporate the adjustments required by the above paragraphs of this ORDER.
   (d) Prior to submission or publication of all Reports of Condition and Income required by the FDIC after the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's ALLL and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the findings of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.

[.6] 6. (a) Within 90 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director for review and comment, a written plan to reduce the Bank's risk position in each asset in excess of $35,000 which is classified "Substandard" in the FDIC's Report of Examination as of April 20, 1991 ("Report"). In developing such plan, the Bank shall, at a minimum:

       (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.
   (b) Such plan shall include, but not be limited to, the following:
       (i) Dollar levels to which the Bank shall reduce each asset within 6 and 12 months from the effective date of this ORDER; and
       (ii) Provision for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors.
   (c) As used in this paragraph, "reduce" means to (1) collect; (2) charge off; or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC.
   (d) Within 30 days from receipt of any comment from the Regional Director of any written plan required by this ORDER to be submitted for review and comment, and after adoption of any recommended changes, the Bank shall approve and implement the plan. The approval shall be recorded in the minutes of a board of directors' meeting.

[.7] 7. (a) Within 90 days from the effective date of this ORDER, and annually thereafter, the board of directors of the Bank shall review the Bank's loan policy and procedures for adequacy and, based upon this review, shall make all appropriate revisions to the policy necessary to strengthen lending procedures and abate additional loan deterioration. The minutes of the board of directors' meeting at
{{12-31-91 p.C-1534}}which such reviews are undertaken shall include the findings of the reviews and a description of any revisions made.
   (b) The initial revision to the Bank's loan policy and procedures required by this paragraph, at a minimum, shall reflect consideration of the criticisms and incorporate the recommendations for improvement included on page 1-a-14 of the Report.
   (c) Within 90 days from the effective date of this ORDER, the Bank shall adopt and implement a written, comprehensive loan review program designed to monitor and ensure compliance with the Bank's loan policy and procedures. The loan review program shall, at a minimum, comply with the guidelines provided in the FDIC Bank Letter 27-89 dated June 20, 1989, and shall provide for a loan grading system which requires annual review of loans or lines of credit of $35,000 or more. A written report shall be provided to the board of directors at least monthly identifying the loans reviewed and the grades assigned, and outlining the reasons for the grades assigned. The minutes of the board of directors' meetings shall reflect consideration of these reports and describe any action taken as a result thereof.

[.8] 8. (a) Within 90 days from the effective date of this ORDER, the Bank shall formulate a written profit plan and comprehensive budget for all categories of income and expense for calendar year 1991 and each calendar year thereafter. The plan required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the Bank's overall earnings and shall contain a description of the operating assumptions that form the basis for major projected income and expense components.
   (b) The plan and budget required by this paragraph, upon completion, shall be submitted to the Regional Director for review and comment. Within 30 days of the receipt of all such comments from the Regional Director and after consideration of all such comments, the Bank shall approve and implement the plan. The approval shall be recorded in the minuted of the board of directors' meeting.
   (c) Prior to the end of each calendar quarter, the Bank's board of directors shall evaluate the Bank's actual performance in relationship to the plan and budget required by this paragraph and record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors' meeting at which such evaluation is undertaken.
   (d) The written profit plan and budget required by this ORDER shall be prepared and submitted for review and comment 30 days prior to each calendar year for which this ORDER is in effect.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director for review and comment a policy for the purpose of properly accounting for, administering, and disposing of other real estate owned ("ORE"). At a minimum, the policy shall itemize all necessary documentation, address accounting considerations, require consistent and independent appraisals, establish terms and guidelines for the resale of ORE, and provide for periodic review of each parcel by the board of directors and for the orderly elimination of ORE from the Bank's books. The guidelines for resale of ORE shall contain specific provisions for the adjustment of each parcel's listing price and book value in relation to the time the parcel is held by the Bank.

   [.10] 10. Within 90 days from the effective date of this ORDER, the Bank shall adopt a Real Estate Appraisal Policy and establish review procedures which conform with Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323.

   [.11] 11. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulation described on pages 6-a through 6-a-2 of the Report. In addition, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.12] 12. Within 90 days from the effective date of this ORDER, the Bank shall conduct a comprehensive review and assessment of all internal routines and controls. Within 150 days from the effective date of this ORDER, the Bank shall correct any deficiencies discovered in such review and all deficiencies discussed on pages 6-b through 6-b-3 of the Report. Additionally, policies and procedures shall be established to prevent the recurrence of any deficiency so noted.
{{8-31-93 p.C-1535}}
   [.13] 13. Within 30 days from the effective date of this ORDER, the Bank shall establish a compliance committee comprised of at least three directors. A majority of the committee members shall not be executive officers or principal shareholders, as those terms are defined in sections 215.2(d) and (j) of Regulation O, 12 C.F.R. §§ 215.2(d) and (j). The committee shall monitor compliance with this ORDER, and on a monthly basis, shall submit to the board of directors a written report detailing the Bank's compliance with this ORDER, including compliance with its written loan and audit policies. The monthly compliance report shall be incorporated into the minutes of the board of directors' meeting. Establishment of this committee does not in any way diminish the responsibility of the entire board of directors for ensuring that compliance with the provisions of this ORDER is achieved.

   [.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 (2) in conjunction with its notice of proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement or notice shall be sent to the FDIC at Washington, D.C., for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice or statement.

   [.15] 15. On the last day of the second month following the date of issuance of this ORDER, and every third month thereafter, the Bank shall furnish written progress reports, signed by each member of the Bank's board of directors, to the Regional Director detailing the form and manner of any actions taken to secure compliance with the ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has in writing released the Bank from making further reports.
   The effective date of this ORDER shall be ten (10) days after its issuance by the FDIC. The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and its successors and assigns.
   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: October 2, 1991.
   Pursuant to delegated authority.

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