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FDIC Enforcement Decisions and Orders

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{{2-28-94 p.C-2275}}
   [10,535] In the Matter of The Citizens Bank, Gainesville, Georgia, Docket No. FDIC-92-127b (5-15-92).

   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 capital; engaging in practices which produce inadequate operating income; operating with inadequate allowance for loan and lease losses; operating in violation of applicable laws or regulations; and operating without proper internal routine and controls. (This order was terminated by order of the FDIC dated 12-13-93; see ¶ 15,768.)
   [.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—Overdue—Accrual of Interest
   [.7] Budget and Earnings Forecast—Preparation Required
   [.8] Violations of Law—Eliminate/Correct
   [.9] Loan Policy—Written Revision—Minimum Requirements
   [.10] Loans—Special Mention—Correct Deficiencies
   [.11] Loans—Extensions of Credit—Documentation System Required
   [.12] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.13] Dividends—Restricted
   [.14] Shareholders—Disclosure—Cease and Desist Order
   [.15] Compliance Reports—Frequency

In the Matter of

THE CITIZENS BANK
GAINESVILLE, GEORGIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-127b

   The Citizens Bank, Gainesville, Georgia ("Bank"), having been advised of its right to a written Notice of Charges and of Hearing detailing unsafe or unsound banking practices and violations of applicable 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 May 5, 1992, whereby solely for the purpose of this proceeding and without admitting or denying {{2-28-94 p.C-2276}}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, non-earning assets, and overdue loans;
   D. Engaging in hazardous lending and ineffective and lax collection practices, including but not limited to: (i) failing to implement the Bank's loan policy, including failing to follow an effective loan review and grading process; (ii) failing to establish and/or enforce repayment programs; (iii) extending credit to borrowers who lack sufficient repayment ability; (iv) capitalizing unpaid accrued interest into the principal balances of new or renewal extensions of credit to delay loan problem recognition; (v) extending credit without properly evaluating collateral protection; and (vi) extending credit with deficient or inadequate supporting loan documentation, including but not limited to current financial statements and cash flow and/or operating information;
   E. Operating the Bank with equity capital that is inadequate to support the kind and quality of assets held by the Bank;
   F. Engaging in practices which produce inadequate operating income and excessive loan losses;
   G. 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;
   H. Engaging in violations of applicable Federal and state laws and regulations, as more fully described on pages 6-a through 6-a-3 of the FDIC's Report of Examination of the Bank as of November 12, 1991; and
   I. Failing to operate with an adequate system of internal routine and controls, as more fully described on page 6-b of the FDIC's Report of Examination of the Bank as of November 12, 1991.
   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 chief executive officer who shall possess the necessary experience and qualifications to provide daily supervision over the Bank's affairs, and 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. 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 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;
{{7-31-92 p.C-2277}}and must be provided at least 30 days prior to the individual assuming the new position.
   (b) To ensure both compliance with this ORDER and the retention of qualified management by the Bank, the board of directors shall, within 60 days from the effective date of this ORDER, develop a written analysis and assessment of the Bank's management and staffing requirements ("Management Policy"), which shall, at a minimum, contain: (i) an analysis of the number and type of positions needed to properly manage the Bank; (ii) a clear and concise description of the required experience and level of compensation for each such position; (iii) an evaluation of each member of the Bank's present management; (iv) a plan to recruit and hire any replacement personnel with the requisite ability and experience necessary to fill management positions at the Bank; (v) a periodic evaluation of each Bank employee's job performance; and (vi) procedures to periodically review and update the Management Policy. The Management Policy and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. Within 30 days from receipt of any comment by the Regional Director and/or the Commissioner, and after consideration of such comment, the board of directors shall approve the Management Policy, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank and its successors and assigns shall implement and follow the Management Policy and/or any subsequent modifications thereto.

   [.2] 2. (a) Within 150 days from the effective date of this ORDER, the Bank shall increase its Tier 1 capital by not less than $1,600,000. Such increase in Tier 1 capital 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 other than loans classified "Loss" as of November 12, 1991, and charged off in accordance with paragraph 4 of this ORDER;
       (iii) The direct contribution of cash by the directors and/or shareholders of the Bank;
       (iv) The collection in cash of assets other than loans previously charged off; or
       (v) Any other means acceptable to the Regional Director and the Commissioner.
(b) (i) If all or part of any 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 Bank's 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 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 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 FDIC or the Commissioner shall be made prior to their dissemination.
   (ii) In complying with the provisions of paragraph 2(b)(i) 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)(ii) of the ORDER shall be furnished within ten (10) calendar days from the date {{7-31-92 p.C-2278}}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) Within 30 days after September 30, 1992, and within 30 days after each December 31, March 31, June 30, and September 30 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 September 30, December 31, March 31, and June 30 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 September 30, December 31, March 31, or June 30 date.
   (d) 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.
   (e) 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. (a) Within 30 days from the effective date of this ORDER, and concurrently with compliance 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 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 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 and loan related assets classified "Loss" at the most recent regulatory examination of the Bank, plus (ii) 50 percent of all loans or portions of loans and loan related assets classified "Doubtful" at such examination, plus (iii) 10 percent of all loans or portions of loans and loan related assets 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 review of the allowance for loan and lease losses 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 November 12, 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 this paragraph 3(b) of the 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 result of its examination of the Bank as of November 12, 1991, which have not been previously collected or charged off, unless otherwise approved in writing by the Regional Director and the Commissioner. Re- {{7-31-92 p.C-2279}}duction 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 November 12, 1991, to not more than $8,000,000; within 360 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $6,500,000; within 540 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $4,000,000; and within 720 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $2,500,000. 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 120 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 November 12, 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 concurrently with the other reporting requirements set forth in paragraph 16 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 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 5(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. (a) Within 30 days from the effective date of this ORDER, and in accordance with the Instructions for the Reports of Condition and Income, the Bank shall reverse on its books all accrued and unpaid interest on any loan that is 90 days or more delinquent in principal or interest payments and is not both well secured and in the process of collection.
   (b) Effective the date of this ORDER, the Bank shall not: (i) accrue interest on any loan that is, or becomes, 90 days or more delinquent in principal or interest payments unless the loan is both well secured and in the process of collection; (ii) add uncollected interest to the unpaid principal balance of any loan on which interest is due unless such addition is supported by additional tangible collateral which adequately and completely secures the loan; (iii) extend credit by means of a new note for uncollected interest due on any loan unless such new extension of credit is supported by additional tangible collateral which adequately and completely secures the loan; or (iv) book uncollected interest by any other means in con- {{7-31-92 p.C-2280}}travention of the Instructions for Reports of Condition and Income.
   (c) For purposes of this paragraph 7 of the ORDER, "well secured" and "in the process of collection" shall have the same meanings as those terms have in the prevailing Instructions for the Reports of Condition and Income.

   [.7] 8. (a) Within 30 days after the effective date of this Order, the Bank shall prepare a realistic and comprehensive budget and earnings forecast on a consolidated basis for calendar year 1992 and shall submit them to the Regional Director and the Commissioner for review and comment.
   (b) As long as this Order remains in effect, the Bank shall prepare realistic and comprehensive calendar year budgets and earnings forecasts on a consolidated basis as of January 1 of each year subsequent to 1992 and shall submit them to the Regional Director and the Commissioner for review and comment no later than January 31 of the budget year.
   (c) In preparing the budgets and earnings forecasts required by this paragraph 8 of the ORDER, the Bank shall, at a minimum:

       (i) Identify the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance; and
       (ii) Describe the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (d) Progress reports comparing the Bank's actual income and expense performance with budgetary projections shall be submitted to the Regional Director and the Commissioner concurrently with the other reporting requirements set forth in paragraph 16 of this ORDER. The Bank's board of directors shall review such progress reports, which review shall be recorded in the minutes of the board of directors.

   [.8] 9. Within 30 days from the effective date of this ORDER, the Bank shall take all necessary steps, consistent with sound banking practices, to eliminate and/or correct all violations of law and regulations committed by the Bank as described on pages 6-a through 6-a-3 of the FDIC's Report of Examination of the Bank as of November 12, 1991. In addition, the Bank shall adopt appropriate procedures to ensure its future compliance with all applicable laws and regulations.

   [.9] 10. (a) Within 60 days from the effective date of this ORDER, the Bank shall review, and revise as necessary, its written loan policy, and the board of directors shall approve the written loan policy as revised and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank shall implement and follow the written loan policy as revised and/or any subsequent modification thereto.
   (b) The Bank's loan policy, as revised, shall include, but not necessarily be limited to, the following:

       (i) The establishment of an effective internal loan review and grading system, which identifies those loans warranting special attention for reasons relating to their ultimate collectibility, and, at a minimum, provides for:
         (A) An identification or grouping of loans that warrant the special attention of management;
         (B) For each loan identified pursuant to subparagraph 10(b)(i)(A), a written statement of the reason(s) why the particular loan merits special attention; and
         (C) A mechanism for reporting periodically to the board of directors on the status of each loan identified pursuant to subparagraph 10(b)(i)(A), and on the action(s) taken or planned by management to improve the quality of each such loan;
       (ii) Guidelines specifying goals for loan portfolio mix and risk diversification;
       (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) A provision requiring written documentation of the borrower's ability to repay each extension of credit or renewal thereof and the establishment of a written repayment plan for each loan which takes into consideration the source of repayment and the purpose of the loan;
{{2-28-94 p.C-2281}}
         (v) A prohibition against (i) the addition of uncollected interest to the unpaid principal balance of any loan on which such interest is due, (ii) the acceptance of a separate note for uncollected interest due on any loan unless supported by additional tangible collateral which adequately and completely secures the loan, (iii) the continuation of accrual of interest on any loan delinquent in principal or interest payments 90 or more, or (iv) any other device that essentially avoids recognition of the overdue status of loans and/or artificially inflates the income of the Bank;
         (vi) Guidelines for obtaining and reviewing required collateral documentation on all extensions of credit or renewals thereof; and
         (vii) A well-defined real estate appraisal program which complies with the requirements of Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323.
       (c) The written loan policy, as revised, and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. Within 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 shall implement and follow the written loan policy and/or any subsequent modification thereto.

   [.10] 11. Within 60 days from the effective date of this ORDER, the Bank shall correct the cited deficiencies in the loans listed for "Special Mention" on pages 2-f through 2-f-7 of the FDIC's Report of Examination of the Bank as of November 12, 1991. Thereafter, the Bank shall service these loans in accordance with its written loan policy.

   [.11] 12. (a) Within 60 days from the effective date of this ORDER, the Bank shall establish an effective system of loan documentation and shall correct all technical exceptions on loans noted on pages 2-g through 2-g-3 of the FDIC's Report of Examination of the Bank as of November 12, 1991, unless otherwise approved in writing by the Regional Director and the Commissioner.
   (b) Effective the date of this ORDER, the Bank shall not extend any credit, whether secured or unsecured, without: (i) first obtaining and analyzing all necessary loan documentation or evidence thereof, including credit information sufficient to identify the borrower's source of repayment and support the scheduled repayment plan; and (ii) including a credit memorandum in the loan file which contains the rationale for extending the credit. In addition, the Bank 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.

   [.12] 13. Within 90 days from the effective date of this ORDER, the Bank's board of directors shall prepare, submit to the Regional Director and the Commissioner for review and comment, and implement a written plan to correct all internal routine and control deficiencies cited on page 6-b of the FDIC's Report of Examination of the Bank as of November 12, 1991.

   [.13] 14. 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.

   [.14] 15. 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 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 20 days prior to dissemination to shareholders. 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.

   [.15] 16. Within 90 days from the effective date of this ORDER, and within 15 days following the end of each calendar quarter {{2-28-94 p.C-2282}}thereafter, while this ORDER remains in effect, 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.
   17. 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 15th day of May, 1992.
   Pursuant to delegated authority.

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