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FDIC Enforcement Decisions and Orders

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   [10,846] In the Matter of Family Bank, University Park, Illinois, Docket No. FDIC-93-153b (7-19-93).

   Bank to cease and desist from such unsafe or unsound practices as following hazardous lending and lax collection practices; operating without adequate controls over credit card operations; operating in violation of applicable laws or regulations; operating with excessive volumes of adversely classified assets; operating with inadequate allowance for loan and lease losses; operating with management whose policies are detrimental to the Bank; and failing to provide adequate supervision over the Bank's affairs. (This order was terminated by order of the FDIC dated 12-10-93; see ¶ 15,767.)

   [.1] Management—Qualifications—Review
   [.2] Board of Directors—Election—Outside Directors Added
   [.3] Credit Card Operations—Administrator Required
   [.4] Credit Card Operations—Written Policy—Minimum Requirements
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Loans—Risk Position—Reduce—Written Plans Required
   [.7] Loans—Special Mention—Correct Deficiencies
   [.8] Technical Exceptions—Eliminate/Correct
   [.9] Loans—Concentrations of Credit—Reduction Plan
   [.10] Assets—Adversely Classified—Eliminate/Reduce
   [.11] Allowance for Loan and Lease Losses—Establish/Maintain
   [.12] Assets—Total Assets—Growth Limited
   [.13] Violations of Law—Eliminate/Correct
   [.14] Dividends—Restricted
   [.15] Profit Plan—Minimum Requirements
{{9-30-93 p.C-3315}}
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Compliance Program—Compliance with Cease and Desist Order

In the Matter of

FAMILY BANK
UNIVERSITY PARK
, ILLINOIS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-93-153b

   Family Bank, University Park, Illinois ("Bank"), having been advised of its right to a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices and violations of law or regulation alleged to have been committed by the Bank, and of its right to a hearing on the charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated June 2, 1993, whereby, solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices and violations of law or regulation, 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 violated laws or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:
   IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as that 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 law or regulation:
   A. Engaging in hazardous lending and lax collection practices, including, but not limited to the following:
   The failure to obtain proper loan documentation, including appraisals:
   The failure to obtain adequate collateral:
   The failure to establish and monitor collateral margins of secured borrowers:
   The failure to obtain current and complete financial information:
   The failure to extend credit with adequate diversification of risk:
   The failure to initiate the timely collection of loans.
   B. Operating without adequate policies, procedures, internal controls and audit coverage with respect to the merchant credit care processing program.
   C. Violating laws or regulations, including:

       1. The unfavorable features prohibition of section 215.4(a)(2) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. § 215.4(a)(2).
       2. The real estate appraisal requirements of Part 323 of the FDIC Rules and Regulations, 12 C.F.R. Part 323.
   D. Operating with an excessive level of adversely classified loans, delinquent loans and nonaccrual loans.
   E. Operating with an inadequate allowance for loans and lease losses for the volume, kind, and quality of loans and leases held.
   F. Operating with management whose policies and practices are detrimental to the Bank and which jeopardize the safety of its deposits.
   G. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management of the Bank to prevent unsafe or unsound banking practices and violations of law or regulation.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

[.1] 1. (a) During the life of this ORDER, the Bank shall have and thereafter retain qualified management. Each member of management shall have the qualifications and experience commensurate with his or her duties and responsibilities {{9-30-93 p.C-3316}}at the Bank. 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.
   (b) During the life of this ORDER, the Bank shall notify the Regional Director of the Chicago Regional Office of the FDIC ("Regional Director") and the Commissioner of Banks and Trust Companies for the State of Illinois ("Commissioner") in writing of any changes in the Bank's management. For purposes of this ORDER, "management" is defined as members of the board of directors and "senior executive officers," as that term is defined in section 32 of the Act ("section 32"), 12 U.S.C. § 1831(i), and section 303.14 of the FDIC Rules and Regulations ("section 303.14"), 12 C.F.R. § 303.14. Prior to the addition of any individual to the board of directors or the employment of any individual as a senior executive officer, the Bank shall comply with the requirements of section 32 and section 303.14.

   [.2] 2. Within 120 days from the effective date of this ORDER, the Bank shall increase the number of directors so that a majority of the board of directors is composed of independent directors. For purposes of this ORDER, a person who is an independent director shall be any individual (a) who is not an officer of the Bank, any subsidiary of the Bank or any of its affiliated organizations; (b) who does not own more than 5 percent of the outstanding shares of the Bank; (c) who is not related by blood or marriage to an officer or director of the Bank or to any shareholder owning more than 5 percent of the Bank's outstanding shares, and who does not otherwise share a common financial interest with such officer, director or shareholder; and (d) who is not indebted to the Bank directly or indirectly by blood, marriage or common financial interest, including the indebtedness of any entity in which the individual has a substantial financial interest in an amount exceeding 5 percent of the Bank's total Tier 1 capital and allowance for loan and lease losses. The addition of any new Bank directors required by this paragraph may be accomplished, to the extent permissible by state statute or the Bank's bylaws, by means of appointment or by election at a regular or special meeting of the Bank's shareholders.

   [.3] 3. As of the effective date of this ORDER, the board of directors shall grant operational authority pertaining to the merchant credit card program to Craig Millington or such other individual with commensurate expertise as the board of directors shall hire to administer the program. For purposes of this paragraph, authority pertaining to the merchant credit program shall be defined as all daily activities associated with the operation of the department, including, but not limited to the authority to: solicit and approve new accounts; negotiate with third-party vendors for marketing, auditing or data processing services on behalf of the Bank; and negotiate merchants' fees. On a monthly basis, Mr. Millington or such other administrator of the program shall present a written report of the status of the department to the full board of directors which includes, but is not limited to, contract negotiations, the dollar volume of business, the level of charge-banks, a list of merchants who have been approved or denied participation in the program, consistent with the standards for approval established by the Bank's merchant credit card policy, adjustments in fees and any other modification in the program.

[.4] 4. (a) Within 30 days from the effective date of this ORDER, the Bank shall formulate, adopt and implement a comprehensive policy for the operation of the merchant credit card processing program. The written plan shall address, at a minimum, the following:

       (i) Limit the aggregate monthly dollar volume of merchant credit card sales to not more than 10 (ten) million dollars within 120 days from the effective date of this ORDER.
       (ii) The establishment of underwriting standards applicable to participating merchants and Independent Service Organizations ("ISO's").
       (iii) The establishment of parameters to monitor the dollar volume of business and charge-backs of individual merchants.
       (iv) A requirement that agreements{{9-30-93 p.C-3317}} with all merchants and ISO's take the form of written contracts which will receive prior review by legal counsel, as warranted.
       (v) Prohibitions against substantial deviations from operating agreements executed with Visa International and Mastercard International which jeopardize the Bank's participation in the program or otherwise create a contingent liability against the Bank.
       (vi) A provision for the periodic audit of participating merchants and ISO's.
       (vii) A provision for the training of individuals involved in the daily operation of the credit card processing program.
       (viii) A provision which prohibits the approval of audiotext merchants into the credit card processing program without the prior written consent of the Regional Director and Commissioner.
       (ix) The establishment of procedures for the approval of accounts, including the prior approval by the full board of directors of any merchant who falls outside the parameters for underwriting established by subparagraph 4(a)(ii) above.
   (b) A copy of the written plan shall be submitted to the Regional Director and Commissioner for review and comment.

[.5] 5. (a) As of the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who is already obligated in any manner to the Bank on any extensions of credit (including any portion thereof) that has been charged off the books of the Bank or classified "Loss" so long as such credit remains uncollected.
   (b) As of the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Substandard," "Doubtful" or is listed for Special Mention and is uncollected unless the Bank's board of directors has adopted, prior to such extension of credit, a detailed written statement giving the reasons why such extension of credit is in the best interest of the Bank. A copy of the statement shall be placed in the appropriate loan file and shall be incorporated in the minutes of the applicable board of directors' meeting.

[.6] 6. (a) Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan to reduce the Bank's risk position in each asset in excess of $60,000 which is classified "Substandard" in the FDIC's Report of Examination as of November 7, 1992 ("FDIC's Report"). A copy of the written plan shall be submitted to the Regional Director and Commissioner upon its completion. In developing such a plan, the Bank shall, at a minimum:

       (i) Review the financial position of each such borrower, including the source of repayment, repayment ability, and alternative repayment sources; and
       (ii) Evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.
   (b) Such plan shall include, but not be limited to, the following:
       (i) Dollar levels to which the Bank shall reduce each asset within 6 months from the effective date of this ORDER; and
       (ii) Provisions for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors.
   (c) As used in this paragraph, "reduce" means to (1) collect; (2) charge off; or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC.

   [.7] 7. Within 30 days from the effective date of this ORDER, the Bank shall correct all deficiencies in the loans listed for "Special Mention" in the FDIC's Report.

   [.8] 8. Within 60 days from the effective date of this ORDER, the Bank shall correct the technical exceptions listed in the FDIC's Report.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan to reduce each of the loan concentrations of credit identified on pages 2-b through 2-b-2 of the FDIC's Report to not more than 25 percent of the Bank's total Tier 1 capital. A copy of the written plan shall be submitted to the Re- {{9-30-93 p.C-3318}}gional Director and Commissioner upon its completion, Such plan shall prohibit any additional advances that would increase the concentrations or create new concentrations and shall include, but not be limited to, the following:

       (a) Dollar levels to which the Bank shall reduce each concentration within 6 and 12 months from the effective date of this ORDER; and
       (b) Provisions for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors.

   [.10] 10. As of the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" as of November 7, 1992 that have not been previously collected or charged off. Any such charged-off asset shall not be rebooked without the prior written consent of the Regional Director and Commissioner. Elimination or reduction of these assets with the proceeds of other Bank extensions of credit is not considered collection for the purpose of this paragraph.

    [.11] 11.(a) Within 10 days from the effective date of this ORDER, the Bank shall replenish its allowance for loan and lease losses ("ALLL") by an expense entry in an amount equal to those loans required to be charged off by this ORDER.
       (b) Within 30 days from the effective date of this ORDER, the Bank shall make an additional provision for loan and lease losses which, after review and consideration by the board of directors, reflects the potential for further losses in the remaining loans or leases classified "Substandard" and all other loans and leases in its portfolio. In making this determination, the board of directors shall consider the Bank's loss experience with comparable loans and leases, the current and prospective financial condition of the borrowers, and economic conditions associated with the environment in which the borrowers operate. At a minimum, the ALLL shall at all times equal at least six (6) percent of total loans.
       (c) Within 30 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to November 7, 1992, shall be amended and refiled if they do not reflect a provision for loan and lease losses and an ALLL which are adequate considering the condition of the Bank's loan portfolio, and which, at a minimum, incorporate the adjustments required by the above subparagraphs of this ORDER.
       (d) Prior to submission or publication of all Reports of Condition and Income required by the FDIC after the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's ALLL and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the findings of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of ALLL provided.

   [.12] 12. During the life of this ORDER, the Bank shall not increase its total assets by more than four (4) percent during any consecutive three-month period without providing, at least 30 days prior to its implementation, a growth plan to the Regional Director and Commissioner. Such growth plan shall include the funding source to support the projected growth, as well as the anticipated use of funds. This growth plan shall not be implemented without the prior written consent of the Regional Director and Commissioner. In no event shall the Bank increase its total assets by more than twelve (12) percent annually. For the purpose of this paragraph, "total assets" shall be defined as in the Federal Financial Institutions Examination Council's Instructions for the Consolidated Reports of Condition and Income.

    [.13] 13. (a) Within 30 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and/or regulation listed on page 6-2 of the FDIC's Report.
    (b) Within 30 days from the effective date of this ORDER, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.14] 14. As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend without the prior written consent of the Regional Director and Commissioner.

    [.15] 15. (a) Within 60 days from the effective date of this ORDER, the Bank shall {{6-30-94 p.C-3319}}formulate, adopt and implement a written profit plan and a realistic, comprehensive budget for all categories of income and expense for calendar year 1993. The plan required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the Bank's overall earnings net interest income, and shall contain a description of the operating assumptions that form the basis for major projected income and expenses components. The budget shall be sufficiently detailed to ascertain the total income and expenses associated with the merchant credit card processing program. A copy of the plan shall be submitted to the Regional Director and Commissioner upon its completion.
       (b) Prior to the end of each calendar quarter, the Bank's board of directors shall evaluate the Bank's actual performance in relation to the plan and budget required by this paragraph and record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors' meeting at which such evaluation is undertaken.

   [.16] 16. 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 (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, notice, or statement shall be sent to the FDIC in Washington, D.C. 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 description, communication, notice, or statement.

    [.17] 17. (a) Within 30 days from the effective date of this ORDER, the Bank's board of directors shall develop, adopt, and implement a program that will provide for monitoring of the Bank's compliance with this ORDER.
    (b) Following the required date of compliance with subparagraph (a) above, the Bank's board of directors shall review the Bank's compliance with this ORDER and record its review in the minutes of each regularly scheduled monthly board of directors' meeting.
   18. Within 30 days of the end of each calendar quarter following the effective date of this ORDER, the Bank shall furnish to the Regional Director and Commissioner written progress reports signed by each member of the Bank's board of directors, detailing the actions taken to secure compliance with the 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 Commissioner have, in writing, released the Bank from making further reports.
   The effective date of this ORDER shall be 10 days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and any successors and assigns thereof.
   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: July 19, 1993.
   Pursuant to delegated authority.

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