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FDIC Enforcement Decisions and Orders

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   [10,466] In the Matter of First Bank of Eunice, Eunice, Louisiana, Docket No. FDIC-92-58b (3-5-92).

   Bank to cease and desist from such unsafe or unsound practices as following hazardous lending and lax collection practices; operating with inadequate capital; operating with an excessive level of poor quality assets; operating with an inadequate loan valuation reserve; operating in such a manner as to produce low earnings; operating in violation of applicable laws or regulations; operating with management whose policies are detrimental to the Bank; and failing to provide adequate supervision over the Bank's affairs.

   [.1] Management — Qualifications — Review
   [.2] Capital — Tier 1 Capital — Increase/Maintain — Methods
   [.3] Conflicts of Interest — Written Policy Required
   [.4] Allowance for Loan and Lease Losses — Establish/Maintain
   [.5] Assets — Adversely Classified — Eliminate/Reduce
   [.6] Loans — Extensions of Credit — Existing Borrowers — Curtail
   [.7] Board of Directors — Loan Review Committee
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   [.8] Loans — Concentrations of Credit — Reduction Plan
   [.9] Violations of Law — Eliminate/Correct
   [.10] Dividends — Restricted
   [.11] Compliance Reports — Frequency

In the Matter of

FIRST BANK OF EUNICE
EUNICE, LOUISIANA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   First Bank of Eunice, Eunice, Louisiana ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices alleged to have been committed by the Bank and of its right to a hearing on the 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 counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated March 5, 1992, whereby solely for the purpose of this proceeding and without admitting or denying 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 directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties, cease and desist from the following unsafe or unsound banking practices:

       (a) engaging in hazardous lending and lax collection practices;
       (b) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;
       (c) operating with a large volume of poor quality loans;
       (d) operating with an inadequate loan valuation reserve;
       (e) operating in such a manner as to produce low earnings;
       (f) operating in violation of Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323;
       (g) operating in violation of section 22(h) of the Federal Reserve Act, as amended, 12 U.S.C. § 375b, and sections 215.4(a)(c) and 215.7 of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(a)-(c), and 215.7 made applicable to state nonmember banks by section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2), as detailed on pages 6-b, 6-b-1 and 6-b-2 of the Report of Examination as of July 29, 1991;
       (h) operating with management whose policies and practices are detrimental to the Bank and 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 active management of the Bank.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. (a) During the life of this ORDER, the Bank shall have management qualified to restore the Bank to a sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible for supervising the Bank's overall lending function.
   (b) Present management shall be assessed on its ability to:

       (i) Comply with the requirements of this ORDER;
       (ii) Improve and thereafter maintain the Bank in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, and earnings adequacy; and
       (iii) Comply with all applicable State and Federal laws and regulations.
   (c) (i) Within 90 days from the effective date of this ORDER, the board of directors shall prepare and forward, to each shareholder of the Bank, a list of potential candidates for nomination to the Bank's board of directors at the next meeting of shareholders of the Bank at which direc- {{5-31-92 p.C-2029}}tors are to be elected. The list of candidates shall include individuals who are independent with respect to the Bank, in such number that, if elected, would cause a majority of the board of directors to be comprised of outside directors as defined herein. The actions taken in identifying potential candidates, including any communication with such individuals, shall be documented and made part of the minutes of the board of directors. Copies of these board minutes shall be provided to the Regional Director within 120 days from the effective date of this ORDER.
   (ii) At the next meeting of the shareholders of the Bank, at which directors of the Bank are to be elected, and at each succeeding meeting of the shareholders at which directors are to be elected, the members of the board of directors who are also shareholders shall nominate and support the election of candidates to the board of directors who are independent with respect to the Bank and who have agreed to stand for election to the board of directors, in such number as is necessary to cause a majority of the board of directors to be and to remain comprised of outside directors.
   (iii) The Bank shall comply with section 32 of the Act, 12 U.S.C. § 1831i, which includes a requirement that the Bank shall notify the Regional Director of the Memphis Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the State of Louisiana ("Commissioner") in writing at least 30 days prior to the individual assuming the new position, or any additions to its board of directors and senior executive officers.
   (d) Within 30 days from the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure that the Bank complies with the provisions of this ORDER. At least two-thirds of the members of such committee shall be outside directors as defined herein. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.
   (e) For the purposes of this ORDER, an "outside director" shall be an individual:
       (i) Who shall not be employed, in any capacity, by the Bank or its affiliates other than as a director of the Bank or an affiliate;
       (ii) Who shall not own or control more than 5 percent of the voting stock of the Bank or its holding company;
       (iii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than 5 percent of the Bank's equity capital and reserves;
       (iv) Who shall not be related to any directors, principal shareholders of the Bank or affiliates of the Bank; and
       (v) Who shall be a resident of, or engage in business in, the Bank's trade area.

   [.2] 2. (a) Within 90 days from the effective date of this ORDER, the Bank shall increase its adjusted Tier I capital to no less than five (5.0) percent of the Bank's adjusted Part 325 total assets. Within 270 days from the effective date of this ORDER, the Bank shall achieve and thereafter maintain adjusted Tier I capital equal to or greater than six (6.0) percent of the Bank's adjusted Part 325 total assets. During the intervening period between the 90th and 270th day, the Bank shall maintain adjusted Tier I capital equal to or greater than five (5.0) percent of the Bank's adjusted Part 325 total assets.
   (b) Any increase in Tier I capital necessary to meet the requirements of Paragraph 2(a) of this ORDER may be accomplished by the following:
       (i) The sale of new securities in the form of common stock; or
       (ii) The direct contribution of cash by the directors, shareholders, or parent holding company of the Bank; or
       (iii) Any other method acceptable to the FDIC.
   (c) If all or part of the increase in Tier I capital required by Paragraph 2(a) of this ORDER is 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 or controlled by them in favor of the plan. Should the im- {{5-31-92 p.C-2030}}plementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare 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 of the plan and, in any event, not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination.
   (d) In complying with the provisions of Paragraph 2 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's 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 Bank securities. The written notice required by this paragraph shall be furnished within 10 days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.
   (e) For purposes of this ORDER the terms "Tier I capital" and "Part 325 total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively, subsections 325.2(m) and 325.2(n), 56 Fed. Reg. 10154, 10161 (1991) (to be codified at 12 C.F.R. 325.2(m) and (n)). The "Analysis of Capital" schedule on page 3 of the FDIC Report of Examination provides the method for determining the ratio of adjusted Tier I capital to adjusted Part 325 total assets as required by this ORDER.
   (f) The Insured Institution shall not lend funds directly or indirectly, whether secured or unsecured, to any purchaser of insured institution stock or to any investor by any other means for any portion of any increase in Tier I capital required herein.

   [.3] 3. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt and implement written policies and procedures designed to bring to the attention of each member of the board conflicts of interest which may exist in approving loans or other transactions in which officers, directors or principal stockholders of the Bank ("Insiders") are involved. Such policies and procedures shall, at a minimum, ensure that each member of the board has been apprised of any potential conflict prior to making a decision and has acted specifically on any loan or other transaction in which Insiders and/or their business associates are, directly or indirectly, involved. The results of board deliberations as to potential conflicts shall be reflected in the minutes of the meeting.

   [.4] 4. (a) Within 30 days from the effective date of this ORDER, the Bank shall establish and shall thereafter maintain, through charges to current operating income, an adequate valuation reserve for loan and lease losses. In determining the adequacy of the valuation reserve for loan and lease losses, the board of directors of the Bank shall at a minimum consider the following:

       (i) Prevailing instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions-Consolidated Reports of Condition and Income";
       (ii) The volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as an analysis of net charge-offs experienced on previously adversely classified loans;
       (iii) The extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of risk associated with such loans;
       (iv) The trend in loan growth, including any rapid increase in loan volume within a relatively short time period;
       (v) General and local economic conditions affecting the collectibility of the Bank's loans;
       (vi) Previous loan loss experience by loan type, including the trend of net charge-offs as a percent of average loans over the past several years;
       (vii) Off balance sheet credit risks;
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       (viii) The overall risk associated with each concentration of credit together with the degree of risk associated with each related individual borrower; and
       (ix) Any other factors appropriate in determining future valuation reserves.
   (b) Prior to the submission of any Report of Condition or Report of Income, the board of directors of the Bank shall review the adequacy of the Bank's valuation reserve for loan and lease losses. The minutes of the board meetings at which each review is undertaken shall indicate the results of the review, the amount of any increase to the reserve, and the basis for the amount of the valuation reserve. The criteria for the review shall be as set forth in Paragraph 4(a).
   (c) Notwithstanding the provisions of Paragraph 4(a) and 4(b) above, the Bank shall achieve, within 30 days of the effective date of this ORDER, a valuation reserve for loan and lease losses, after charge off of loans classified "Loss" and one-half of the loans classified "Doubtful" as required in Paragraph 5(a) below, of not less than $350,000.
   (d) The requirements of Paragraph 4(c) above are not to be construed as a standard for future operations.

   [.5] 5. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge off or collection, all assets classified "Loss" and one-half of the assets classified "Doubtful" as of July 29, 1991, that have not been previously collected or charged off. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   (b) Within 90 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of July 29, 1991, and those assets classified "Doubtful" that have not previously been charged off pursuant to this ORDER to not more than $2,300,000.
   (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of July 29, 1991, and those assets classified "Doubtful" that have not previously been charged off pursuant to this ORDER to not more than $2,000,000.
   (d) Within 270 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of July 29, 1991, and those assets classified "Doubtful" that have not previously been charged off pursuant to this ORDER to not more than $1,800,000.
   (e) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of July 29, 1991, and those assets classified "Doubtful" that have not previously been charged off pursuant to this ORDER to not more than $1,500,000.

   [.6] 6. (a) Beginning with the effective 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. Subject to the limitations in 6(c), below, the requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower provided that any renewal is in conformance with all applicable laws, rules, and regulations.
   (b) Beginning with the effective date of this ORDER, the Bank shall not make any further extensions of credit, directly or indirectly, to any borrower whose loans are adversely classified "Substandard" as of July 29, 1991, without prior approval by the Bank's board of directors after the board's affirmative determination, as reflected in the minutes of the meeting, that the extension of credit is in full compliance with the Bank's loan policy, that the extension of credit is necessary to protect the Bank's interest or is adequately secured, that credit analysis has determined the customer to be creditworthy, and that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title and lien documents.
   (c) Notwithstanding anything contained in subsection 6(b) above, beginning with the effective date of this ORDER, the Bank shall not advance any additional funds to Mitchell N. Ashy, and/or his related interests, either directly or indirectly or through any means by which
{{5-31-92 p.C-2032}}Mitchell N. Ashy, and/or his related interests receive the tangible economic benefit of the proceeds. This provision is not to be construed as prohibiting renewal of credit already extended Mr. Ashy, and/or his related interests, provided that any renewal is in conformance with all applicable laws, rules and regulations.

   [.7] 7. Within 60 days from the effective date of this ORDER the Bank's board of directors shall establish and appoint a loan committee to review and approve in advance all extensions of credit, and/or renewals that when aggregated with all other extensions of credit to that borrower, either, directly or indirectly, exceed or would exceed $100,000. The review should include financial, income, and cash flow information, collateral values and lien information, repayment terms, past performance by the borrower, the purpose of the extension, and whether the extension complies with the Bank's loan policy and applicable laws, rules and regulations. The loan committee shall meet at least twice monthly and shall maintain written minutes which shall document its review conclusions, approvals, denials and recommendations. At least monthly, the loan committee shall submit its written minutes to the board of directors. At least two-thirds of the members of the loan committee shall be independent, outside directors as defined in Paragraph 1(e) of this ORDER.

   [.8] 8. Within 60 days from the effective date of this Order, the Bank shall submit to the Regional Director, for review and comment, a plan which includes appropriate time frames, for reducing each loan concentration as of July 29, 1991, to an amount which shall be less than 25 percent of the Bank's Tier 1 capital. In addition, within 90 days from the effective date of this Order, the Bank shall develop and submit to the Regional Director for review and comment, a policy designed to address and control concentration risk in the future. No more than 30 days after the receipt of any comment from the Regional Director, the Bank shall implement a plan for reducing each loan concentration and a policy addressing risk concentration taking any comments of the FDIC into consideration.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall take all steps necessary, consistent with sound banking practices, to correct all violations of law and regulation which are set out on pages 6-b, 6-b-1, 6-b-2, 6-b-3 and 6-b-4 of the Report of Examination of the Bank as of July 29, 1991. In addition, the Bank shall henceforth comply with all applicable laws and regulations.

   [.10] 10. While this ORDER is in effect, the Bank shall not declare or pay any cash dividends on its capital stock without the prior written approval of the Regional Director and the Commissioner.

   [.11] 11. On the fifteenth day of the first calendar quarter following the effective date of this ORDER, and on the fifteenth day of every third month 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 has released the Bank in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Bank.
   This ORDER shall become effective 10 days from the date of its issuance.
   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: March 5, 1992.
   Pursuant to delegated authority.

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