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FDIC Enforcement Decisions and Orders

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{{8-31-92 p.C-2395}}
   [10,565] In the Matter of The Farmers Bank, Union Point, Georgia, Docket No. FDIC-92-175b (6-15-92).

   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 allowance for loan and lease losses; operating without proper internal routine and controls; operating in violation of applicable laws or regulations; and operating without adequate loan, asset/liability management, and investment policies.
   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Allowance for Loan and Lease Losses—Establish/Maintain
   [.5] Assets—Adversely Classified—Eliminate/Reduce—Timetable
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Loans—Overdue—Accrual of Interest
   [.8] Budget and Earnings Forecast—Preparation Required
   [.9] Violations of Law—Eliminate/Correct
   [.10] Loan Policy—Written Revision—Minimum Requirements
   [.11] Asset/Liability Management—Written Policy—Minimum Requirements
   [.12] Loans—Extensions of Credit—Documentation System Required
   [.13] Investment Policy—Revision—Minimum Requirements
   [.14] Bank Operations—Internal Routine and Controls—Correct Deficiencies
   [.15] Dividends—Restricted
   [.16] Loans—Concentrations of Credit—Reduction Plan
   [.17] Loans—Overdue—Ratio—Reduction Required
   [.18] Shareholders—Disclosure—Cease and Desist Order
   [.19] Compliance Reports—Frequency

{{8-31-92 p.C-2396}}
In the Matter of

THE FARMERS BANK
UNION POINT, GEORGIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-175b

   The Farmers Bank, Union Point, 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 charged 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 June 8, 1992, 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, nonearning 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; (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; (vi) failing to reverse accrued interest on loans that are 90 days or more delinquent in principal or interest payments and which are not both well secured and in the process of collection; and (vii) 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. 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;
   F. Failing to operate with an adequate system of internal routine and controls, including, but not limited to: (i) failing to establish procedures to ensure the independence of the Bank's internal auditor; and (ii) failing to utilize adequate written participation agreements for loan participants purchased by the Bank;
   G. Engaging in violations of applicable Federal and state laws and regulations, as more fully described on page 6-a-2 of the FDIC's Report of Examination of the Bank as of December 2, 1991; and
   H. Failing to develop, approve, and implement adequate loan, asset/liability management, and investment policies.
   IT IS FURTHER ORDERED that the Bank and its successors and assigns take affirmative action as follows:

[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 in- {{8-31-92 p.C-2397}}clude 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; 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; and must be provided at least 30 days prior to the individual assuming the new position.

   [.2] (b) To ensure both compliance with this ORDER and the retention of qualified management by the Bank, the board of directors shall, within 90 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.

   [.3] 2. (a) Within 30 days after June 30, 1992, and within 30 days after each September 30, December 31, March 31, and June 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 June 30, September 30, December 31 and March 31 date. If such capital ratio is less than 6.0 percent, the Bank shall, within 90 days from the date of such calculation, increase its Tier 1 capital by an amount sufficient to raise its capital ratio to not less than 6.0 percent as of the nearest preceding June 30, September 30, December 31 or March 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. {{8-31-92 p.C-2398}}§§ 325.2(m) and 325.2(n)), effective April 10, 1991.

[.4] 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 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 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 December 2, 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.

   [.5] 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" by the FDIC as a result of its examination of the Bank as of December 2, 1991, 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 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" in the FDIC's Report of Examination of the Bank as of December 2, 1991, to not more than $5,500,000; within 360 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $5,000,000; within 540 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $4,500,000; and within 720 days from the effective date of this ORDER, the Bank shall reduce aggregate total to not more than $2,000,000. The requirements of this paragraph 5(a) of the ORDER shall not be construed to establish a standard for future operations of the Bank.
       (b) Within 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 December 2, 1991, and which aggregated $150,000 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 19 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.

[.6] 6. (a) Effective the date of this ORDER, the Bank shall not extend, directly {{8-31-92 p.C-2399}}or indirectly, and 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 in 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 provide all interest due at the time of such renewal or extension is collected in cash from the borrower.

[.7] 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 extensions 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 contravention 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.

[.8] 8. (a) Within 30 days after the effective date of this Order, the Bank shall prepare a realistic and comprehensive budget and earnings forecast for calendar year 1992 and shall submit it 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 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 19 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.

[.9] 9. Within 30 days from the effective {{8-31-92 p.C-2400}}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 page 6-a-2 of the FDIC's Report of Examination of the Bank as of December 2, 1991. In addition, the Bank shall adopt appropriate procedures to ensure its future compliance with all applicable laws and regulations.

[.10] 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 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.
   (b) The Bank's loan policy, as revised, shall include, but not necessarily be limited to, the following:

       (i) Appropriate and adequate collection procedures, including, but not limited to, the action to be taken against borrowers who fail to make timely payments;
       (ii) A prohibition against (A) the addition of uncollected interest to the unpaid principal balance of any loan on which such interest is due, (B) 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, (C) the continuation of accrual of interest on any loan delinquent in principal or interest payments 90 days or more and not both well-secured and in the process of collection, or (D) any other device that essentially avoids recognition of the overdue status of loans and/or artificially inflates the income of the Bank;
       (iii) Guidelines for obtaining and reviewing required collateral documentation on all extensions of credit or renewals thereof;
       (iv) Guidelines for requiring financial information on unsecured loans;
       (v) Guidelines on real estate appraisals for loans of $100,000 or less;
       (vi) 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; and
       (vii) Guidelines establishing loan extension limitations.
   (c) The written loan policy 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.

[.11] 11. (a) Within 60 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 an asset/liability management policy. The policy should include, at a minimum, (1) the establishment of a funds management committee which will conduct periodic review of the bank's deposit structure, (2) establishment of loan and deposit pricing guidelines, (3) establishment of GAP ratio guidelines, and (4) establishment of guidelines limiting dependence on short term liabilities to fund longer term assets.
   (b) 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 asset/ liability management policy and/or subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank shall implement and follow the asset/ liability management policy and/or any subsequent modification thereto.

[.12] 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 page 2-e of the FDIC's Report of Examination of the Bank as of December 2, 1991, unless otherwise approved in writing by the Regional Director and the Commissioner. In addition, and as long as this ORDER remains in effect, the Bank shall obtain and evaluate all necessary loan documenta- {{8-31-92 p.C-2401}}tion, or evidence thereof, before any further credit is extended by the Bank.
   (b) Effective the date of this ORDER, the Bank shall not extend any credit, whether secured or unsecured, without first obtaining and analyzing credit information sufficient to identify the borrower's source of repayment and support the scheduled repayment plan. This analysis should be documented by a credit memorandum to file which should contain 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.

   [.13] 13. Within 60 days from the effective date of this ORDER, the Bank shall amend its written investment policy to include goals and strategies for the Bank's investments. Such policy shall address, at a minimum, the desired liquidity, marketability, income, quality, maturity, and diversification of the Bank's investments, and shall specify suitable investments. The Bank shall, within 90 days of the effective date of this Order, submit its amended investment policy 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 investment 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 investment policy and/or any subsequent modification thereto.

   [.14] 14. 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 December 2, 1991.

   [.15] 15. 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.

   [.16] 16. Within 60 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 plan to reduce the loan concentration noted on page 2-b of the FDIC's Report of Examination of the Bank as of December 2, 1991, to not more than 25 percent of the Bank's Tier 1 capital. Further, such plan shall establish appropriate procedures to ensure that no future extensions of credit to one borrower and his "related interests," as such term is defined in section 215.2(k) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.2(k), shall exceed 25 percent of the Bank's Tier 1 capital. Within 30 days from receipt of any comment by the Regional Director and/or the Commissioner, the board of directors shall approve the plan, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank shall implement and follow the plan.

   [.17] 17. Within 90 days from the effective date of this ORDER, the Bank's board of directors shall develop and 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 of 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. Within 30 days from receipt of any comment by the Regional Director and/or the Commissioner, the board of directors shall approve the plan of action which approval shall be recorded in the minutes of the board of directors. 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.

   [.18] 18. 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 {{8-31-92 p.C-2402}}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.

   [.19] 19. Within 90 days from the effective date of this ORDER, and within 15 days following the end of each calendar quarter 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.
   20. 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 successors and assigns, and to the extent provided in section 8(i) of the Act, 12 U.S.C. § 1818(i), its institution-affiliated parties. 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 June, 1992.
   Pursuant to delegated authority.

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