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   [11,280] In the Matter of Southwest Bank, Jennings, La., Docket No. FDIC-96-52b (4-10-96)

   Bank to cease and desist from such unsafe and unsound practices as engaging in hazardous lending and lax collection practices; operating with inadequate capital in relation to the kind and quality of assets held by the bank; operating with a large volume of poor quality loans; operating with an inadequate loan valuation reserve; operating in such a manner as to produce operating losses; operating in violation of Sections 325 and 353 of the FDIC Rules and Regulations; operating contrary to FDIC policy statements; operating with management whose policies and practices are detrimental to the bank and jeopardize the safety of its deposits; and operating with inadequate supervision by the board of directors. (This order was modified pursuant to order of the FDIC dated 8-21-96. See ¶16,112.)

   [.1] Management—Qualifications Specified
   [.2] Management—Written Policy Required
   [.3] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.4] Capital—Tier 1 Capital—Increase
   [.5] Loan Loss Reserve—Maintain Adequate Valuation
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   [.6] Loans—Risk Position—Reduce Adversely Classified Loans, Accrued Interest, and Lines of Credit
   [.7] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits
   [.8] Loans—Collections Policies—Review and Strengthen
   [.9] Loans—Consolidated Farm Services Administration—Loss Claims— Procedures for Filing
   [.10] Loans—Overdue—Monthly Reports
   [.11] Loans—Internal Review Procedure
   [.12] Loans—Concentration of Credit—Monitoring Required
   [.13] Loans—Interest—Accrual of
   [.14] Violations of Law—Eliminate or Correct
   [.15] Profit Plan—Preparation Required
   [.16] Dividends—Restricted
   [.17] Compensation—Bonuses—Restricted
   [.18] Shareholders-Disclosure—Cease and Desist Order
   [.19] Cease and Desist Order—Compliance Reports

In the Matter of

SOUTHWEST BANK
JENNINGS, LOUISIANA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-96-52b

   Southwest Bank, Jennings, Louisiana ("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 and/or regulations alleged to have been committed by the Bank and of its right to a hearing on the 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 counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated March 19, 1996, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, violations of regulations, and contravention of FDIC policy, 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 regulations and contravention of policies. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Bank, cease and desist from the following unsafe or unsound banking practices, violations of regulations, and contravention of policies:
   (a) engaging in hazardous lending and lax collection practices;
   (b) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;
   (c) operating with a large volume of poor quality loans;
   (d) operating with an inadequate loan valuation reserve;
   (e) operating in such a manner as to produce operating losses;
   (f) operating in violation of sections 325 and 353 of the FDIC Rules and Regulations, 12 C.F.R. §§ 325 and 353;
   (g) operating contrary to the FDIC's Statement of Policy on Risk Based Capital; contrary to FDIC's Statement of Policy on Duties and Responsibilities of Bank Directors and Officers; and contrary to the FFIEC Interagency Statement of Policy — Allowance for Loan and Lease Losses;
   (h) operating with management whose policies and practices are detrimental to the {{6-30-96 p.C-4179}}Bank and jeopardize the safety of its deposits; and
   (i) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

       [.1] 1. (a) During the life of this ORDER, the Bank shall have management qualified to restore a Bank to a sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible for supervising the Bank's overall lending function. The chief executive officer and the senior lending official may be the same individual.
       (b) Present management shall be assessed on its ability to:
         (i) Comply with the requirements of this ORDER;
         (ii) Improve and thereafter maintain the Bank in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, and earnings adequacy; and
         (iii) Comply with all applicable State and Federal laws, regulations, and FDIC and FFIEC policy statements.
         (c) (i) During the life of this ORDER, the Bank shall notify the Regional Director of the Memphis Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the State of Louisiana ("Commissioner") in writing of any resignations and/or terminations of any members of its board of directors and/or any of its senior executive officer(s) within 15 days of the event.
         (ii) The Bank shall comply with section 32 of the Act, 12 U.S.C. § 1831i.

       [.2] (d) (i) To ensure both compliance with this ORDER and qualified management for the Bank, the board of directors, within 60 days from the effective date of this ORDER shall develop a written policy ("Management Policy") which shall incorporate an analysis of the Bank's management and staffing requirements and shall, at a minimum address (1) both the number and type of positions needed to properly manage the Bank, (2) a clear and concise description of the needed experience and pay for each job, (3) an evaluation of present management, (4) a plan to recruit, hire or replace personnel with requisite ability and experience, (5) a periodic evaluation of each individual's job performance, and (6) the establishment of procedures to periodically review and update the Management Policy.
       (ii) 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, 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 meeting of the board of directors. Thereafter, the Bank and its directors, officers and employees shall implement and follow the Management Policy and any modifications thereto.

   [.3] (e) Within 30 days from the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure that the Bank complies with the provisions of this ORDER. At least two-thirds of the members of such committee shall be independent, outside directors as defined herein. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.
   (f) For the purposes of this ORDER, an "outside director" shall be an individual:
       (i) Who shall not be employed, in any capacity, by the Bank or its affiliates other than as a director of the Bank or an affiliate;
       (ii) Who shall not own or control more than 5 percent of the voting stock of the Bank;
       (iii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than 5 percent of the Bank's equity capital and reserves;
       (iv) Who shall not be related to any {{6-30-96 p.C-4180}}directors, principal shareholders of the Bank or affiliates of the Bank; and
       (v) Who shall be a resident of, or engage in business in, the Bank's trade area.

   [.4] 2. (a) On or before April 10, 1996, the Bank shall have adjusted Tier I capital equal to or greater than four percent (4.0%) of the Bank's adjusted Part 325 total assets and total risk-based capital equal to or greater than eight percent (8.0%) of the Bank's risk weighted assets. Thereafter, during the life of this ORDER, the Bank shall maintain adjusted Tier I capital equal to or greater than four percent (4.0%) of the Bank's adjusted Part 325 total assets and total risk-based capital equal to or greater than eight percent (8.0%) of the Bank's risk weighted assets.
   (b) In addition, on or before July 31, 1996, the Bank shall achieve adjusted Tier I capital equal to or greater than five percent (5.0%) of the bank's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Bank shall maintain adjusted Tier I capital equal to or greater than five percent (5.0%) of the Bank's adjusted Part 325 total assets.
   (c) In addition, on or before September 30, 1996, the Bank shall achieve adjusted Tier I capital equal to or greater than five and one-half percent (5.5%) of the bank's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Bank shall maintain adjusted Tier I capital equal to or greater than five and one-half percent (5.5%) of the Bank's adjusted Part 325 total assets.
   (d) In addition, on or before December 31, 1996, the Bank shall achieve adjusted Tier I capital equal to or greater than seven and one-half percent (7.5%) of the Bank's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Bank shall maintain adjusted Tier I capital equal to or greater than seven and one-half percent (7.5%) of the Bank's adjusted Part 325 total assets.
   (e) Any increase in Tier I capital necessary to meet the ratio required by Paragraph 2 of this ORDER may be accomplished by the following:
       (i) The sale of new securities in the form of common stock; or
       (ii) Any other method acceptable to the FDIC.
   (f) If all or part of the increase in Tier I capital required by Paragraph 2 of this ORDER is accomplished by the sale of new securities, the board of directors of the Bank shall adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation of the plan and, in any event, not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Unit, 550 17th Street, N.W., Room F-250, Washington, D.C. 20429 for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination. If the Regional Director allows any part of the increase in Tier I capital to be provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue, including but not limited to those terms and conditions relative to the interest rate and any convertability factor, shall be presented to the Regional Director for prior approval.
   (g) In complying with the provisions of Paragraph 2 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities written notice of any planned or existing development or other changes which are 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 shall be furnished within 10 days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.
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   (h) For purposes of this ORDER the terms "Tier I capital," and "Part 325 total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively subsections 325.2(t), and 325.2(v), 12 C.F.R. §§ 325.2 (t) and (v). The "Analysis of Capital" schedule on page 4.2 of the FDIC Report of Examination provides the method for determining the ratio of adjusted Tier I capital to adjusted Part 325 total assets as required by this ORDER. Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, entitled "Statement of Policy on Risk-Based Capital" provides the method for determining the ratio of risked-based capital to weighted assets.
   (i) The Insured Institution shall not lend funds directly or indirectly, whether secured or unsecured, to any purchaser of insured institution stock or to any investor by any other means for any portion of any increase in Tier I capital required herein.

   [.5] 3. (a) Within 30 days from the effective date of this Order, the Bank shall establish and shall thereafter maintain, through charges to current operating income, an adequate valuation reserve for loan and lease losses. In determining the adequacy of the valuation reserve for loan and lease losses, the board of directors of the Bank shall at a minimum consider the following:

       (i) Prevailing instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions—Consolidated Reports of Condition and Income";
       (ii) The volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as an analysis of net charge-offs experienced on previously adversely classified loans;
       (iii) The extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of risk associated with such loans;
       (iv) The trend in loan growth, including any rapid increase in loan volume within a relatively short time period;
       (v) General and local economic conditions affecting the collectibility of the Bank's loans;
       (vi) Previous loan loss experience by loan type, including the trend of net charge-offs as a percent of average loans over the past several years;
       (vii) Off balance sheet credit risks;
       (viii) The overall risk associated with each concentration of credit together with the degree of risk associated with each related individual borrower;
       (ix) FFIEC Interagency Statement of Policy — Allowance for Loan and Lease Losses; and
       (x) Any other factors appropriate in determining future valuation reserves.
   (b) Prior to the submission of any Report of Condition or Report of Income, the board of directors of the Bank shall review the adequacy of the Bank's valuation reserve for loan and lease losses. The minutes of the board meetings at which each review is undertaken shall indicate the results of the review, the amount of any increase to the reserve, and the basis for the amount of the valuation reserve. The criteria for the review shall be as set forth in Paragraph 3(a).
   (c) Notwithstanding the provisions of Paragraph 3(a) and 3(b) above, the Bank shall achieve, within 30 days of the effective date of this ORDER, a valuation reserve for loan and lease losses, after charge off of loans classified "Loss" as required in Paragraph 4(a) below, of not less than $750,000.
   (d) In the event that the Regional Director and/or the Commissioner determine, at subsequent examinations and/or visitations, that the Bank's valuation reserve for loan and lease losses is inadequate, the Bank shall amend its Consolidated Reports of Condition and Income.
   (e) The requirements of Paragraph 3(c) above are not to be construed as a standard for future operations.

   [.6] 4. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all loans classified "Loss" as of September 30, 1995, that have not been previously collected or charged-off. Reduction of these assets through proceeds of other loans made by the Bank is not {{6-30-96 p.C-4182}}considered collection for the purpose of this paragraph.
   (b) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, $163,000 of accrued interest being carried on the Bank's books, and classified "Loss" as of September 30, 1995.
   (c) On or before April 10, 1996, the Bank shall eliminate from its books by charge-off or collection, an additional $683,000 in accrued interest classified "Loss" as of September 30, 1995.
   (d) Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director and the Commissioner for review and approval a written plan of action directed at lessening the Bank's risk position in each line of credit which was classified "Substandard" as of September 30, 1995, and which aggregated $50,000 or more. Such plan shall include, but not be limited to, the following:

       (i) Target dollar levels to which the Bank will reduce each line of credit within three months, six months, and twelve months from the effective date of this ORDER; and
       (iii) Provisions for the submissions of monthly written progress reports under this Paragraph 4 to the Bank's board of directors for review and recordation in the board minutes.
   (e) As used in Paragraph 4 the word "reduce" means (1) to collect, (2) to charge off, or (3) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.

   [.7] 5. (a) Beginning with 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 has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss" and is uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.
   (b) Beginning with the effective date of this ORDER, the Bank shall not make any further extensions of credit, directly or indirectly, to any borrower whose loans are adversely classified "Substandard" as of September 30, 1995, without prior approval by the Bank's board of directors after the board's affirmative determination, as reflected in the minutes of the meeting, that:

       (i) The extension of credit is in full compliance with the Bank's loan policy;
       (ii) that the extension of credit is necessary to protect the Bank's interest or is adequately secured;
       (iii) that credit analysis has determined the customer to be creditworthy; and
       (iv) that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title and lien documents.
   6. Beginning with the effective date of this ORDER, the Bank shall:

       [.8] (a) Review and strengthen its collection policies and procedures;

       [.9] (b) Establish and adopt written procedures to ensure the Bank's timely filing of loss claims on all assets guaranteed by the Consolidated Farm Services Administration in which principal or interest has been in default for 90 days; and

       [.10] (c) Establish and adopt written procedures which shall provide for the submission of a monthly written report to the board of directors identifying all loans for which principal or interest is past due 90 days or more and identifying the collection action being taken on each of the identified loans. A copy of the report shall be submitted to the Regional Director within seven days of each board meeting.

       [.11] 7. (a) Within 30 days of the effective date of this ORDER, the board of directors shall establish an internal loan review and grading system ("System") to periodically review the Bank's loan portfolio and identify and categorize problem credits. At a minimum, the System shall provide for:

      (i) The identification of the overall quality of the loan portfolio;
      (ii) The identification and amount of each delinquent loan;
      (iii) An identification or grouping of {{6-30-96 p.C-4183}}loans that warrant the special attention of management;
         (iv) For each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the reason(s) why the particular loan merits special attention;
         (v) An identification of credit and collateral documentation exceptions;
         (vi) The identification and status of each violation of law, rule or regulation;
         (vii) An identification of loans not in conformance with the Bank's lending policy, and exceptions to the Bank's lending policy; and
         (viii) A mechanism for reporting periodically, no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.
       (b) A copy of the reports submitted to the board, as well as documentation of the action taken by the Bank to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.

   [.12] 8. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a program establishing a method to review, monitor, and analyze the risks associated with the industry concentrations of credits set out on page 3d of the Report of Examination of the Bank as of September 30, 1995.

   [.13] 9. Beginning with the effective date of this ORDER, the Bank shall:

       (a) Implement a written loan interest nonaccrual policy which conforms with the requirements contained in the Instructions for Preparation of Reports of Conditions and Income published by the Federal Financial Institutions Examination Council ("Call Report Instructions"); and
       (b) Place all loans guaranteed by the Consolidated Farm Services Administration, with principal or interest in default for a period of 90 days or more, on a nonaccrual status; unless, the Bank's board of directors has made an affirmative determination, as reflected in the minutes of the meeting, that the loan is both well secured and in process of collection as defined by the Call Report Instructions. A summary of all documentation reviewed by the Bank's board of directors in supporting its decision shall be attached to the minutes.
       (c) Any loan not placed in a nonaccrual status in accordance with paragraph 9(b) above, which subsequently becomes 270 days past due, shall immediately be placed in a nonaccrual status; unless, the Bank has obtained the written certification of the Consolidated Farm Services Administration that the loan is in the process of collection and the guaranty will be honored.

   [.14] 10. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of Regulations and contravention of FDIC and FFIEC policies which are set out on pages 8.8 and 8.9 of the Report of Examination of the Bank as of September 30, 1995. In addition, the Bank shall henceforth comply with all applicable laws, regulations, and FDIC and FFIEC policy statements.

       [.15] 11. (a) Within 60 days from the effective date of this ORDER, and by January 15 of each calendar year thereafter, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:
         (i) identification of the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance;
         (ii) realistic and comprehensive budgets;
         (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections on not less than a quarterly basis; and
         (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
       (b) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan which approval shall be recorded in the minutes of {{6-30-96 p.C-4184}}the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification.

   [.16] 12. While this ORDER is in effect, the Bank shall not declare or pay any cash dividends on its capital stock without the prior written approval of the Regional Director and the Commissioner.

   [.17] 13. During the life of this ORDER, any bonuses paid which exceed 10 percent of an individual's annual salary must be adequately supported as to appropriateness. Supporting documentation is to be maintained with the minutes of the Board meeting at which the bonus was approved.

   [.18] 14. 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 the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Division of Supervision, Registration and Disclosure Unit, 550 17th Street, N.W., Room F-250, Washington, D.C. 20429 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.

   [.19] 15. On the fifteenth day of the second month following the effective date of this ORDER, and on the fifteenth day of every third month thereafter, the Bank shall furnish written progress reports to the Regional Director 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 has released the Bank in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Bank.
   This ORDER shall become effective 10 days from the date of its issuance.
   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: April 10, 1996
   Pursuant to delegated authority.

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