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FDIC Enforcement Decisions and Orders

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{{4-30-94 p.C-2625}}
   [10,615] In the Matter of Public Bank, Saint Cloud, Florida, Docket No. FDIC-92-257b (8-13-92).

   Bank to cease and desist from such unsafe or unsound practices as failing to provide adequate supervision over the Bank's affairs; operating with inadequate capital; 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 allowance for loan and lease losses; investing in securities which are inappropriate considering Bank's condition and management's expertise; and operating with excessive interest rate risk exposure. (This order was terminated by order of the FDIC dated 2-3-94; see ¶ 15,805.)

   [.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] Assets—Adversely Classified—Eliminate/Reduce—Timetable
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Loans—Special Mention—Correct Deficiencies
   [.8] Budget and Earnings Forecast—Preparation Required
   [.9] Dividends—Restricted
   [.10] Asset/Liability Management—Written Policy—Minimum Requirements
   [.11] Investment Policy—Revision—Minimum Requirements
   [.12] Shareholders—Disclosure—Cease and Desist Order
   [.13] Compliance Reports—Frequency

In the Matter of

PUBLIC BANK
SAINT CLOUD, FLORIDA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-257b

   Public Bank, Saint Cloud, Florida ("Bank"), having been advised of its right to a written Notice of Charges and of Hearing detailing unsafe or unsound banking practices 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 30, 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, 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 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:
   A. Failure by the board of directors of the Bank to exercise supervision and direction over the affairs of the Bank adequate to prevent unsafe or unsound practices;
   B. Operating the Bank with equity capital that is inadequate to support the kind and quality of assets held by the Bank;
{{4-30-94 p.C-2626}}
   C. 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, cash flow information and/or operating information; and (iii) extending credit to borrowers with inadequate repayment ability and/or without establishing the borrower's means and method of repayment;
   D. Operating the Bank with an excessive volume of adversely classified assets;
   E. Engaging in practices which produce inadequate operating income and excessive loan losses;
   F. 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;
   G. Operating the Bank with investments in certain Federal agency securities, as described on page 6-a of the FDIC's Report of Examination of the Bank as of January 8, 1992, that are inappropriate for retention in the Bank's investment portfolio in light of the Bank's condition and management's level of expertise regarding such investments; and
   H. Operating the Bank in a manner that creates excessive liability interest rate sensitivity in the 6 month, 1 year, and 3 year timeframes, in contravention of the Bank's Asset/Liability Policy.
   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 Bank shall have and retain qualified management. At a minimum, such management shall include: (i) a qualified chief executive officer with proven ability in managing a bank of comparable size, who shall be given specific written authority by the Bank's board of directors to implement lending, investment, and operating policies and procedures in accordance with the Bank's written policies and with sound banking practices, and who shall be the senior officer in terms of overall responsibility for the daily management and operation of the Bank; (ii) a qualified chief lending officer who shall not also hold the position of chief executive officer, who has a appropriate level of lending, collection, and loan supervision experience necessary to supervise the upgrading of a low quality loan portfolio, who shall be given specific written authority by the Bank's board of directors to implement sound lending practices and to improve the quality of the loan portfolio, and who shall be the senior officer in terms of overall responsibility for the lending area; (iii) a qualified senior operations officer who shall be given specific written authority by the Bank's board of directors to improve the quality of the Bank's records through the implementation of sound recordkeeping, accounting, and reporting procedures, including the maintenance of accurate general ledger accounts, subsidiary records, and general ledger tickets, and who shall ensure timely recording of all banking transactions; and (iv) a qualified internal auditor, or an outside audit firm performing the duties of an internal auditor, who shall review the activities of the Bank and its personnel to determine conformance with sound banking principles and practices, with applicable laws and regulations, and with the Bank's policies, and who shall report directly to the Bank's board of directors on a regular basis. 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 all applicable laws and regulations, and (iv) maintain all aspects of the Bank in, or if necessary, 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 Florida State Comptroller ("Comptroller") in writing of any proposed changes in the composition of the board of directors, executive officers or other officers of the Bank. 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 thirty (30) days prior to the individual assuming the new position.

[.2] 2. (a) No later than December 31, 1992, the Bank shall increase its Tier 1 capital by not less than $950,000. Such {{10-31-92 p.C-2627}}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 assets other than loans classified "Loss" or "Doubtful" as of January 8, 1992, 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 Comptroller.
    (b) (i) If all or part of the 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 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 Comptroller for review. Any changes in such offering materials requested by the FDIC or the Comptroller 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) 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 December 31, 1992, and within 30 days after each March 31, June 30, September 30, and December 31 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 March 31, June 30, September 30, or December 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 March, 31, June 30, September 30, or December 31 date.
   (d) In addition to the requirements of paragraphs 2(a) and 2(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. {{10-31-92 p.C-2628}}§§ 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 have and 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 at least once for each calendar quarter. At a minimum, such review 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 the 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 January 8, 1992, 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 the FDIC's examination of the Bank as of January 8, 1992, which have not been previously collected or charged off, unless otherwise approved in writing by the Regional Director and the Comptroller. 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] 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 January 8, 1992, to not more than $1,600,000; within 360 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $1,400,000; within 540 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $1,000,000; and within 720 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $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 90 days from the effective date of this ORDER, the Bank shall develop and submit to the Regional Director and the Comptroller for review and comment a written plan of action to reduce each asset which was adversely classified by the FDIC as of January 8, 1992, and which aggregated $50,000 or more as of that date. Such plan of action shall thereafter be implemented and monitored by the Bank, and progress reports thereon shall be submitted by the Bank to the Regional Director and the Comptroller at 90 day intervals concurrently with the other reporting requirements set forth in paragraph 13 of this ORDER.
   (c) As used in paragraph 5 of this 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 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 {{10-31-92 p.C-2629}}other extension of credit with the Bank that has been classified, in whole or in part, "Substandard" and is uncollected, unless, prior to the extension of credit, a majority of the Bank's board of directors first: (i) determines that such extension of credit 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 extension of credit. A written record of the board of directors' determination and approval of any extension of credit 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.

   [.7] 7. Within 90 days from the effective date of this ORDER, the Bank shall correct the cited correctable deficiencies in the assets listed for "Special Mention" on page 2-c of the FDIC's Report of Examination of the Bank as of January 8, 1992. Thereafter, the Bank shall service these loans in accordance with its written loan policy.

    [.8] 8. (a) Within 60 days from 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 this budget and earnings forecast to the Regional Director and the Comptroller 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 Comptroller 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, with particular emphasis on improving the Bank's net interest margin and reducing controllable overhead expenses; 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 Comptroller at 90 day intervals concurrently with the other reporting requirements set forth in paragraph 13 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. 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 Comptroller.

[.10] 10. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall develop and implement a plan, consistent with sound banking practices, to bring its excessive interest rate sensitive liability position in the 6 month, 1 year, and 3 year timeframes into compliance with the Bank's Asset/Liability Policy, which requires that the ratio of the Bank's rate sensitive assets to its rate sensitive liabilities for such timeframes be maintained at a level of between 80 and 120 percent.
   (b) Within sixty (60) days from the effective date of this ORDER, the Bank shall review the Bank's Asset/Liability Policy and shall review said policy to include a target dependency ratio and operating range for the ratio of rate sensitive assets less rate sensitive liabilities to total assets, described on page 1-a-5 of the FDIC's Report of Examination of the Bank as of January 8, 1992. The board of directors shall approve the revised Asset/Liability Policy and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank shall adopt and implement the revised Asset/Liability {{10-31-92 p.C-2630}}Policy and/or any subsequent modifications thereto.

[.11] 11. (a) Within thirty (30) days from the effective date of this ORDER, the Bank shall review its current investments, with particular attention to its investment in Federal agency securities, as described on page 6-a of the FDIC's Report of Examination of the Bank as of January 8, 1992. To the extent that any of the Bank's investments are not in compliance with the Federal Financial Institutions Examinations Council ("FFIEC") Revised Policy Statement on Securities Activities ("FFIEC Securities Policy") (57 Fed. Reg. 4028, February 3, 1992, effective February 10, 1992), the Bank shall take all necessary steps consistent with sound banking practices to divest itself, as quickly and prudently as possible, of such investments including all investments that are not appropriate for the Bank's condition and the level of expertise of the Bank's management.
   (b) Within sixty (60) days from the effective date of this ORDER, the Bank shall review the Bank's Investment Policy and shall revise said Investment Policy to define in specific detail the types of Federal agency obligations or products that are permissible investments for the Bank. At a minimum, such review shall comply with the FFIEC Securities Policy and shall consider the condition of the Bank and the level of expertise of the Bank's management. The board of directors shall approve the revised Investment Policy and/or any subsequent modifications thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank shall adopt and implement the revised Investment Policy and/or any subsequent modifications thereto.

   [.12] 12. 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 Comptroller, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC or the Comptroller shall be made prior to dissemination of the communication, notice, or statement.

   [.13] 13. Within 45 days from the effective date of this ORDER, and within 45 days following the end of each calendar quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Comptroller 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 Comptroller 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.
   14. 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.
   Done at Atlanta, Georgia, this 13th day of August, 1992.
   Pursuant to delegated authority.

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