FDIC: 1992 - Docket No. FDIC-92-221b


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{{9-30-92 p.C-2541}}
[¶10,600] In the Matter of Cairo Bank Company, Cairo, Georgia, Docket No. FDIC-92-221b (7-20-92).

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; following hazardous lending and lax collection practices; operating with excessive volumes of adversely classified assets; engaging in practices which produce inadequate operating income; operating with inadequate liquidity; and operating in violation of applicable laws or regulations.

   [.1] Board of Directors—Supervision of Bank Affairs—Written Plan
   [.2] Management—Qualifications—Review
   [.3] Insider Transactions—Disclosure—Policy Required
   [.4] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.5] Allowance for Loan and Lease Losses—Establish/Maintain
   [.6] Assets—Adversely Classified—Eliminate/Reduce
   [.7] Assets—Adversely Classified—Reduction—Plan/Timetable
   [.8] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.9] Loans—Overdue—Accrual of Interest
   [.10] Loans—Extensions of Credit—Documentation System Required
   [.11] Loan Policy—Written Revision—Minimum Requirements
   [.12] Loans—Extensions of Credit—Specific Borrowers—Investigation Required
   [.13] Budget and Earnings Forecast—Preparation Required
   [.14] Bank Holding Company—Income Tax Allocation—Accounting Required
   [.15] Dividends—Restricted
   [.16] Liquidity and Funds Management—Policy Required
   [.17] Institution-Affiliated Party—Transaction—Restitution
   [.18] Violations of Law—Eliminate/Correct
   [.19] Shareholders—Disclosure—Cease and Desist Order
   [.20] Compliance Reports—Frequency

In the Matter of

CAIRO BANKING COMPANY
CAIRO, GEORGIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-221b

   The Cairo Banking Company, Cairo, 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 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 July 13, 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 or violations of applicable regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and de- {{9-30-92 p.C-2542}}termined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had committed violations of applicable 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/or violations of 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 equity capital that is inadequate to support the kind and quality of assets held by the Bank;
   D. Engaging in hazardous lending and ineffective and lax collection practices, including but not limited to: (i) operating the Bank in contravention of its written loan policies and procedures; (ii) extending credit (a) which is unsecured or which is inadequately secured and (b) which has inadequate or deficient supporting loan documentation, including current financial statements, insurance coverage, title searches or legal opinions, current objective appraisals of collateral, and cash flow and/or operating information; (iii) extending credit to borrowers with inadequate repayment ability and/or without establishing the borrower's means and method of repayment; (iv) extending credit to an excessive number of out-of-territory borrowers; (v) failing to implement an adequate loan review and grading system; and (vi) financing unpaid accrued interest through separate extensions of credit;
   E. Operating the Bank with an excessive volume of adversely classified assets and past due loans;
   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. Operating the Bank with inadequate liquidity in contravention of the Bank's written liquidity and asset/liability policy guidelines; and
   I. Violating applicable Federal regulations, as more fully described on page 6-a of the FDIC's Report of Examination of the Bank as of November 18, 1991.
   IT IS FURTHER ORDERED that the Bank and its successors and assigns take affirmative action as follows:

[.1] 1. Within 90 days from the effective date of this ORDER, the board of directors of the Bank shall review its supervision and direction of the affairs of the Bank in light of the FDIC's Report of Examination of the Bank as of November 18, 1991, and shall adopt a written plan that actively involves the board of directors in ensuring the effective implementation of existing policies which govern the affairs of the Bank and provide management with parameters within which to operate the Bank on a daily basis in a manner sufficient to prevent unsafe and unsound practices and violations of laws and regulations.

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[.3] 3. (a) Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt and implement written policies and procedures requiring disclosure to each member of the Bank's board of directors of any extension of credit or other financial transaction by the Bank to and/or for the benefit of, directly or indirectly, any of the Bank's directors, executive officers or principal shareholders or to any related interest of such persons, or to any person related by blood, marriage or common financial interest to any such persons (such extensions of credit or other financial transactions are referred to herein as "insider transactions"). The written policies and procedures shall include, at a minimum, provisions which: (i) provide guidelines to prevent a conflict of interest or the appearance of a conflict of interest on the part of any of the Bank's directors or executive officers in insider transactions engaged in by the Bank; (ii) require the prior approval of any insider transaction by a majority of the Bank's board of directors, with any interested director abstaining from the voting; and (iii) require that a written record of the board of directors' determination and approval of any insider transaction be maintained in the minutes of the board of directors.
(b) For purposes of this Paragraph 3 of the ORDER, the terms "executive officer", "principal shareholder" and "related interest" shall have the meanings ascribed to such terms in sections 215.2(d), 215.2(j) and 215.2(k), respectively, of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.2(d), 215.2(j) and 215.2(k).

[.4] 4. (a) Within 90 days from the effective date of this ORDER, the Bank shall increase its Tier 1 capital by not less than $1,400,000. Such increase in Tier 1 capital may be accomplished by any one of more of the following:

(b) (i) If all or part of the increase in the Bank's Tier 1 capital required under paragraph 4(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 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 disclosure 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 4(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 4(b)(ii) shall be furnished within ten (10) calendar days from the date 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 thirty (30) days after June 30, 1992, and within 30 days after each September 30, December 31, March 31, and June 30 date 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, or 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.
   (d) In addition to the requirements of paragraphs 4(a) and 4(c) 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.

[.5] 5. (a) Within 30 days from the effective date of this ORDER, and concurrently with compliance with the requirements of paragraph 6 of this ORDER, the Bank shall establish and thereafter continually maintain an adequate allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income, by charges against current operating income. In complying with the requirements of this paragraph 5(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 {{9-30-92 p.C-2545}}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 loan-related assets or portions of loans or loan-related assets classified "Loss" at the most recent regulatory examination of the Bank, plus (ii) 50 percent of all loans or loan-related assets or portions of loans or loan-related assets 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 or nonaccrual loans, the total loan volume of the Bank, including non-classified or internally graded credits, 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 18, 1991, shall reflect a provision for the allowance for loan and lease losses necessary to comply with paragraph 5(a) of this ORDER. If necessary to comply with this paragraph 5(b) of the ORDER, the Bank shall file amended Reports of Condition and Income within 30 days from the effective date of this ORDER.

[.6] 6. Within 30 days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection, charge odd, 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 the FDIC's examination of the Bank as of November 18, 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 6 of the ORDER.

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[.9] 9. (a) Within 30 days from the effective date of this ORDER, and in accordance with the Instructions for the Preparation of Reports of Condition and Income, the Bank shall reverse on its books all accrued and unpaid interest on any loan which is 90 days or more delinquent in principal or interest payments and which 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 be 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 contravention of the Instructions for the Preparation of Reports of Condition and Income.
(c) For purposes of this paragraph 9 of the ORDER, "well secured" and "in the process of collection" shall have the same meaning as those terms have in the prevailing Instructions for the Preparation of Reports of Condition and Income.

[.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall establish an effective system of loan documentation and shall correct the technical exceptions on loans noted on pages 2-c and 2-c-1 of the FDIC's Report of Examination of the Bank as of November 18, 1991. In addition and as long as this ORDER remains in effect, the Bank shall insure that all necessary loan documentation, or evidence thereof, is obtained and evaluated before any further credit is extended by the Bank.

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[.12] 12. Within 30 days from the effective date of this ORDER, the Bank shall obtain direct positive confirmations on all adversely classified loans and all loans with Florida addresses. The Bank shall fully investigate any discrepancies between the borrower(s) names in Bank loan documentation and the actual borrowers receiving the proceeds of extensions of credit which are discovered during the confirmation process, including but not limited to those which might involve the following extensions of credit: Barberry, Inc., J.H. Londono and Eastern Marketing Group, Inc. Additionally, the Bank shall seek to obtain evidence of any side agreements which purport to alter the liability of any Bank borrowers from that presently reflected in the Bank's records. The investigations and all other actions taken by the Bank to comply with this paragraph 12 of the ORDER shall be addressed in the progress reports required by paragraph 20 of this ORDER.

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[.14] 14. Within 30 days from the effective date of this ORDER, the Bank shall engage the services of independent certified public accountants to review the Bank's income tax liability under a separate entity filing basis for calendar years 1988, 1989, and 1990. The independent certified public accountants' review shall serve as the basis for determining the extent to which a cash refund, if any, is due to the Bank from its holding company, Cairo Banchshares, Inc., as a result of the income tax benefit due the Bank based on its 1991 net operating loss position. Upon a determination that any such refund is due, the Bank shall seek immediate cash reimbursement of such refund from Cairo Banchshares, Inc.

[.15] 15. As of the effective 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 90 days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner for review and comment a written plan of action, including appropriate timetables, to maintain or attain an adequate liquidity position, maintain or attain an adequate level of volatile liability dependence, and maintain or achieve compliance with {{5-31-94 p.C-2548}}the Bank's written funds management policies. No more than 30 days after the receipt of any comment from the Regional Director and/or the Commissioner, the board of directors shall approve such plan of action and/or any subsequent modification thereto, 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 progress reports thereon shall be submitted by the Bank to the Regional Director and the Commissioner at 90-day intervals concurrently with the other reporting requirements set forth in paragraph 20 of this ORDER.

[.17] 17. Within 30 days from the effective date of this ORDER, the Bank shall take all appropriate actions to obtain reimbursement of the $60,000 fee, together with appropriate interest thereon at the prevailing rate(s) of interest charged by the Bank at the time, which was paid by the Bank to John H. LeGette, deceased former Bank president and chairman of the board, on May 24, 1991, for an option to purchase real estate leased by the Bank under a lease agreement dated October 9, 1986, which already provided for such option.

[.18] 18. 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 regulations committed by the Bank, as described on page 6-a of the FDIC's Report of Examination of the Bank as of November 18, 1991. In addition, the Bank shall adopt appropriate procedures to ensure its future compliance with all applicable laws and regulations.

[.19] 19. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER (i) in conjunction with the Bank's next shareholder communication and also (ii) 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 shall be made prior to dissemination of the communication, notice, or statement.

   [.20] 20. Within 90 days from the effective date of this ORDER, and every 90 days thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner have released the Bank in writing from making further reports. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the appropriate board meetings.
   21. 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 20th day of July, 1992.
   Pursuant to delegated authority.

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