Federal Deposit
Insurance Corporation

{{10-31-00 p.C-4586}}
   [¶11,547] In the Matter of First Bank of Childersburg, Vincent, Alabama, Docket No. 98-076b (8-10-98)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 8-28-00; see ¶16,265.)
   [.1] Management—Qualifications Specified
   [.2] Audit—Independent Auditors Required
   [.3] Loans—Loan Officer-Qualifications Specified
   [.4] Loan Policy—Preparation or Revision of Policy Required
   [.5] Loans—Internal Review Procedure
   [.6] Assets—Adversely Classified Assets—Reduction Required
   [.7] Capital—Increase Required
   [.8] Loan Loss Reserve Establishment of or Increase Required
   [.9] Directors and Officers—Personal Expenses
   [.10] Payments—Restricted
   [.11] Violations of Law—Correction of Violations Required
   [.12] Bank Operations—Internal Routine and Control Procedures, Written Plan Required
   [.13] Brokered Deposits—Notification Required
   [.14] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required
   [.15] Bank Operations—Education Plan, Compliance With Law and Regs
   [.16] Ethics—Written Policy Required
   [.17] Budget and Earning Forecast—Preparation Required
   [.18] Strategic Plan—Preparation of Required

In the Matter of
FIRST BANK OF CHILDERSBURG
VINCENT,ALABAMA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-98-076b
   First Bank of Childersburg, Vincent, Alabama, ("Bank"), having been advised of its right to receive a written Notice of Charges and of Hearing ("NOTICE") detailing the unsafe or unsound banking practices and violations of applicable laws and regulations alleged to have been committed by the Bank and of its right to a hearing regarding such alleged charges under section 8(b) of the {{10-31-00 p.C-4587}}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 a representative of the Legal Division of the Federal Deposit Insurance Corporation ("FDIC"), dated August 10, 1998, whereby solely for the purpose of this proceeding and without admitting or denying any of the alleged charges of unsafe or unsound banking practices and violations of applicable laws and regulations the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Respondent had engaged in unsafe or unsound banking practices and had committed violations of applicable laws and regulations.
   The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS HEREBY ORDERED, that the Bank cease and desist from the following unsafe or unsound banking practices:
   A. Failing to provide adequate supervision and direction over the affairs of the Bank by the board of directors of the Bank to prevent unsafe or unsound practices and violations of laws and regulations;
   B. Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   C. Operating the Bank with an excessive volume of adversely classified assets;
   D. Operating the Bank with an inadequate level of capital protection;
   E. Engaging in hazardous lending and ineffective and lax collection practices as evidenced by:

   i. Renewing or extending credit which is inadequately secured;
   ii. Renewing or entending the due dates of loans without collection in cash of interest due or obtaining adequate additional collateral to secure credit advanced for the purpose of paying interest;
   iii. improperly extending repayment on loans without properly signed renewal notes and/or extension agreements;

   [.1] 1. (a) Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall have and retain qualified management and staff. Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. At a minimum, management shall include a chief executive officer with proven ability in managing a bank of comparable size, and experience in upgrading a low quality loan portfolio, improving earnings, and other matters needing particular attention. Management shall also include a senior lending officer with significant appropriate lending, {{10-31-98 p.C-4588}}collection, and loan supervision experience, and experience in upgrading a low quality loan portfolio. Management shall also include a chief operations officer with significant appropriate experience in managing the operations of a bank of similar size and complexity in accordance with sound banking practices. Each member of management shall be provided appropriate written authority from the Bank's Board of Directors to implement the provisions of this ORDER.
   (b) 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; (iv) ascertain that the Bank Information Systems are fully Year 2000 compliant, and are appropriately tested to demonstrate such compliance; and, (v) maintain all aspects of the Bank in, or restore all aspects of the Bank to, a safe and sound condition, including asset quality, capital adequacy, earnings adequacy, liquidity adequacy, and management effectiveness.
   (c) During the life of this ORDER, the Bank may not add any individual to its Board of Directors or employ or engage any individual as a chief executive officer, chief operations officer, chief lending officer, other executive officer, internal auditor, loan operations officer/manager, or loan review officer without the prior written consent of the Superintendent and the Regional Director. The Bank shall notify the Superintendent and the Regional Director in writing of any proposed changes in management. Such notification shall be in addition to any application and prior approval requirements established by section 32 of the Act 12 U.S.C. Section 1831i and implamenting regulations; must include the names and qualifications of any replacement personnel; and must be provided at least (30) days prior to the date the individual is to assume office.
   (d) To facilitate compliance with paragraph 1(a), the Bank's Board of Directors shall in no more than sixty (60) days from the effective date of this ORDER develop and approve a written analysis and assessment of the Bank's management and staffing needs (management and staffing plan), which shall include, at a minimum:

   i) identification of both the type and number of officer positions needed to manage and properly supervise the affairs of the Bank;
   ii) evaluation of each Bank officer, and in particular the chief executive officer, chief lending officer, and the chief operating officer, that includes and takes into full consideration the requirements of paragraph 2 of this ORDER, to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition;
   iii) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the Board of Directors determines are necessary to fill Bank officer or staff member positions consistent with the analysis, evaluation and assessment as provided in this paragraph and other parts of this ORDER; and
   iv) an organization chart.

   [.3] 3. (a) The bank shall hire or appoint a qualified person to serve as the Bank's loan operations officer or manager. The qualifications of the loan operations officer shall be assessed on the officer's: training in loan operations and loan documentation, ability, loan operations experience in a financial institution, ability to comply with the requirements of this ORDER and the Bank's written loan policy, and knowledge of applicable laws and regulations and sound banking procedures.
   (b) The loan operations officer shall be responsible for all operations of the Bank's loan department including loan documentation, credit and collateral files, and loan entries. The loan operations officer shall report monthly and directly to the Bank's audit committee. The committee will then report its findings to the entire board of directors. The reports shall:

   i) disclose all outstanding documentation exceptions,
   ii) separately and prominently list each loan made during the preceding month without complete documentation as required by the Bank's loan policy, and
   iii) disclose each loan made during a month that represents an exception to the Bank's loan policy that was not properly approved according to the requirements of the policy.

   i) responsibility of the Board of Directors in reviewing, ratifying and approving loans and extensions;
   ii) guidelines under which unsecured loans will be granted;
   iii) the guidelines for rates of interest and terms of repayment for unsecured loans and secured loans;
   iv) with regard to secured loans: 1) limitations on the amount advanced in relation to the value of the collateral; and 2)

the documentation required by the Bank for each type of secured loan;
   v) the maintenance and review of complete and current credit files on each borrower;
   vi) appropriate and adequate collection procedures, including, but not limited to, the actions to be taken against borrowers who fail to make timely payments;
   vii) guidelines establishing limitations on the major volume of loans in relation to total assets;
   viii) appropriate limitations on extension of credit through overdrafts and cash items;
   ix) the determination and documentation of sources and terms of loan repayment;
   x) retention of lien searches and appraisals covering personal property and liens on real estate;
   xi) maintenance of written, individual loan file comments by officers;
   xii) prohibitions against the extension or renewal or extension of loans without full collection of interest due, with acceptance of separate notes for the payment of interest, or the capitalization of interest to the balance of the note;
   xiii) prohibitions against the making of loans for speculative purposes;
   xiv) procedures regarding designations of nonaccrual loans;
   xv) procedures for identifying, supervising, and collecting problem loans;
   xvi) a mechanism for Board approval of loans to be sold to another financial institution including a review of all documentation provided and representations made to the institution;
   xvii) periodic review of the overdue, problem and/or adversely classified or special mention loans by the Board of Directors, so as to monitor management's administration of such distressed credits, and to provide guidance; and
   xviii) any other loan policy recommendations contained in the November 17, 1997, Report of Examination.

   [.5] (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall adopt an internal loan review and grading system to provide for the periodic review of the Bank's loan portfolio in order to identify and categorize the Bank's loans, and other extensions of credit which are carried on the Banles books as loans, on the basis of credit quality. The Bank shall also within sixty (60) days from the effective date of this ORDER, submit the written loan review policy to the Superintendent and Regional Director for their review and approval. The loan review and grading system shall be fully implemented thirty (30) days from such submission to the Superintendent and Regional Director. The board shall consider comments and adopt recommended changes no more than thirty (30) days from the receipt of any such comment from the Superintendent and/or the Regional Director. Such system and its implementation shall be satisfactory to the Superintendent and the Regional Director as determined at its initial review and at subsequent examinations and/or visitations. At a minimum, the grading system shall provide for:

   i) specification of standards and criteria

for assessing the credit quality of the Bank's loans;
   ii) application of loan grading standards and criteria to the Bank's loan portfolio;
   iii) categorization of the Bank's loans into groupings based on the varying degrees of credit and other risks which may be presented under the applicable grading standards and criteria, but in no case, will a loan be assigned a rating higher than that assigned by examiners at the last examination of the bank;
   iv) assessment of the likelihood that each loan exhibiting credit and other risks will not be repaid according to its terms and conditions;
   v) identification of any loan that is not in conformance with the Bank's loan policy;
   vi) identification of any loan which presents any unsafe or unsound banking, practice or condition or is otherwise in violation of any applicable State or Federal law, regulation, or statement of policy; and
   vii) requirement of a written report to be made to the Bank's Board of Directors and Audit Committee, not less than quarterly after the effective date of this ORDER. The report shall identify the status of those loans which exhibit credit and other risks under the applicable grading standards/criteria and the prospects for full collection and/or strengthening of the quality of any such loans.

   [.6] 6. (a) Immediately upon the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" in the November 17, 1997, Report of Examination that have not been previously collected or charged-off. Immediately upon the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, 50 percent of those assets classified "Doubtful" in the November 17, 1997, Report of Examination that have not been previously collected or charged off, unless otherwise approved in writing by the Superintendent and the Regional Director. Elimination of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   (b) Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" in the November 17, 1997, Report of Examination and those assets classified "Doubtful" that have not previously been charged off to not more than $4,300,000
   (c) Within two hundred forty (240) days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" in the November 17, 1997, Report of Examination and those assets classified "Doubtful" that have not previously been charged off to not more than $3,000,000.
   (d) Within three hundred sixty (360) days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" in the November 17, 1997, Report of Examination and those assets classified "Doubtful" that have not previously been charged off to not more than $1,700,000.
   (e) The above requirements for reduction of classified assets are not to be constued as standards for future operations and, in addition to the foregoing, the Bank shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph. As used above, the word "reduce" means:

   i) collect;
   ii) charge off; or
   iii) sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the Superintendent and the Regional Director.

   [.7] 7. (a) During the life of this ORDER, the Bank shall, at all times, have Tier 1 capital in such an amount as to equal 6.5 percent of the Bank's total assets. The level of Tier 1 capital to be maintained during the life of this ORDER shall be in addition to a fully funded allowance for loan and lease losses, the adequacy of which shall be satisfactory to the Superintendent and the Regional Director as determined at subsequent reviews, examinations and/or visitations.
   (b) The Bank's board of directors shall calculate the ratio of Tier 1 capital as a percentage of its total assets ("capital ratio") as of the effective date of this order and within thirty (30) days after each December 31, March 31, June 30, and September 30 thereafter while this ORDER remains in effect. If such capital ratio is less than 6.5 percent, the Bank shall, within ninety (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 6.5 percent as of the nearest preceding March 31, June 30, September 30, or December 31 date.
   (c) Any increase in Tier 1 capital necessary to meet the requirements of this paragraph may be accomplished by the following:

   i) sale of common stock; or
   ii) direct contribution of cash by the Board of Directors and/or shareholders of the Bank, or
   iii) other means acceptable to the Superintendent and the Regional Director.

   [.8] 8. (a) Prior to the end of the calendar quarter following the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate allowance for loan and lease losses.
   (b) For the purpose of the board determination of reserve adequacy, the adequacy of the allowance shall be determined after the charge-off of all loans or other items classified "Loss" in the November 17, 1997, Report of Examination. The policy shall provide for a review of the allowance at least once each calendar quarter. Said review should be completed at least ten (10) days prior to the end of each quarter, in order that the findings of the Board of Directors with respect to the loan and lease loss allowance may be properly reported in the quarterly Reports of Condition and Income. The calculation of reserve adequacy should incorporate: the results of the Banks internal loan review, loan and lease loss experience, trends of delinquent and nonaccrual loans, estimates of potential loss exposure of significant credits, concentrations of credit, and present and prospective economic conditions. A deficiency in the allowance shall be remedied in the calendar quarter it is discovered, prior to submitting the Reports of Condition and Income, by a charge to current operating earnings. The minutes of the Board of Directors meeting at which such review is undertaken shall indicate the results of the review. Upon completion of the review, the Bank shall increase and maintain its allowance for loan and lease losses consistent with the established policy for the allowance for loan and lease losses.

   [.9] 9. (a) Following the effective date of this ORDER, the Bank shall require expenses submitted for reimbursement by a Bank employee, officer or director to include an explanation of how the expenditure relates to actual or potential Bank business. The Bank shall require and maintain the explanation and all necessary supporting documentation including: receipts showing the name, address, and telephone number of the business where the expense was incurred; lists of persons present when the expense was incurred, explanation of how each person's presence was related to the business purpose of the event, and what items or services were paid for.
   (b) The audit committee shall approve all Bank expenses submitted by an employee, officer or director before any reimbursements are made. The audit committee shall also approve or disapprove all expenditures/ charges made by employees, officers, or directors on credit cards issued to them by the bank. The audit committee will disapprove any personal charges not related to bank business and employees, officers, and directors will promptly reimburse the bank for those charges. The audit committee may, at its discretion, disapprove any other expense. No expense allowances will be disbursed to employees, officers, or directors in advance in cash or by other means without proper documentation and approvals as required above. The audit committee's minutes reflecting approval or disapproval of each expense shall be presented at the monthly board meeting and noted in the Board of Directors' minutes.
   (c) In addition, the internal auditor will examine bank records as a regular part of the internal audit program to determine compliance with this ORDER, expense reimbursement policy, and internal controls.
   (d) The audit committee will also investigate and approve or disapprove all expenditures by bank officers during calendar year 1997. Officers will promptly reimburse the bank for any disapproved expenses or personal expenses not related to bank business.

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

   [.11] 11. After the effective date of this ORDER, the Bank, consistent with sound banking practices, shall correct all violations of laws and regulations detailed in the November 17, 1997, Report of Examination. In addition, the Board of Directors shall ensure the Bank's future compliance with all applicable laws, regulations, and statements of policy.
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   [.12] 12. Within ninety (90) days from the effective date of this ORDER, the Bank shall develop or revise, adopt, and implement written policies and procedures to provide effective guidance and control over internal routine and controls of the Bank, in accordance with safe and sound banking practices. Among other provisions, the revised policies and procedures shall specifically provide for correction of all internal routine and control deficiencies scheduled in the November 17, 1997, Report of Examination. Such policy and its implementation shall be in a form and manner acceptable to the Superintendent and the Regional Director as determined at subsequent examinations and/or visitations.

   [.13] 13. (a) While this ORDER, is in effect, the Bank shall give written notice to the Superintendent and the Regional Director at such time as the Bank intends to make use of brokered deposits. The notification should indicate how the brokered deposits are to be utilized with specific reference to credit quality of investments/loans and the effect on the Bank's funds position and asset/liability matching. The Superintendent and the Regional Director shall have the right to reject the Bank's plans for utilizing brokered deposits.
   (b) For purposes of this ORDER, brokered deposits are defined as described in section 337.6(a)(1) of the FDIC Rules and Regulations to include any deposits funded by third party agents or nominees for depositors, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or asserts a right to federal deposit insurance.
   (c) The bank will also develop and adopt a plan within thirty (30) days from the effective date of this ORDER to either eliminate the current reliance on brokered deposits or justify the retention of those deposits. This plan should also be submitted within thirty (30) days from the effective date of this ORDER to the Superintendent and Regional Director for their review and approval. The board shall consider comments and adopt recommended changes no more than thirty (30) days from the receipt of any such comment from the Superintendent and/or the Regional Director. Such plan and its implementation shall be in a form and manner acceptable to the Superintendent and the Regional Director as determined at the initial review and subsequent examinations and/or visitations.

   [.14] 14. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall adopt a funds management policy. The funds management policy shall include, at a minimum:

   i) methods for repricing deposits and loans;
   ii) goals and strategies for managing and/or improving the Bank's interest rate risk exposure and provisions requiring that the Bank's position be regularly measured and reported to the Board of directors;
   iii) monitoring of the interest rate sensitivity of present investments and deposits and projections of the types of investments and deposits to improve such liquidity position;
   iv) coordination of the Bank's loan, investment, operating, and budget and profit planning, policies with the written funds management policy; and,
   v) alternative funding sources.

   [.15] 15. (a) Within ninety (90) days of the effective date of this ORDER, the Bank's Board of Directors shall develop and adopt an educational program for each member of the Board. The educational Program shall include, at a minimum:

   i) specific training in the areas of lending, operations, and compliance with laws,

rules and regulations applicable to banks chartered in the state of Alabama;
   ii) specific training in the duties and responsibilities of the Board of Directors in connection with the safe and sound operation of the Bank; and
   iii) provision for period training.

   [.16] 16. (a) The Board will adopt an Ethics Policy that requires a complete disclosure of all outside economic interests of all bank directors and officers at least annually. Specifically, relationships between directors/officers and borrowing customers will be thoroughly reviewed and approved by the full Board. This disclosure will certify to the Board of Directors, the Superintendent, and the Regional Director all of each director/ officer's relationships and financial interests in or with any business or individual. Such disclosures will be completed within sixty (60) days of the effective date of this ORDER and copies provided to the Board, the Superintendent, and the Regional Director.
   (b) The Ethics Policy will be required within sixty (60) days from the effective date of this order and will be furnished to the Superintendent and the Regional Director for their comment and approval. The Ethics Policy shall be implemented thirty (30) days from such submission to the Superintendent and Regional Director. Any subsequent modification to the Ethics Policy shall also be submitted to the Superintendent and the Regional Director for review and approval. The board shall consider comments and adopt recommended changes no more than thirty (30) days from the receipt of any such comment from the Superintendent and/or the Regional Director. Once the Ethics Policy is approved, adopted, and implemented, all directors, officers and employees will be given instruction on its requirements within (30) days. Such policy and its implementation shall be satisfactory to the Superintendent and the Regional Director as determined at its initial review and at subsequent examinations and/or visitations.

   [.17] 17. (a) No later than November 30, 1998, the Bank shall formulate a written plan and comprehensive budget for all categories of income and expense. Thereafter, the Bank shdould formulate such a plan and budget by November 30 of each subsequent year.
   (b) The plan and budget shall include formal goals and strategies, consistent with sound banking practices, to improve the Bank's net interest margin, increase interest income, and improve and sustain earnings of the Bank. The plan shall include a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (c) Following the end of each calendar quarter, the Board of Directors shall evaluate the Bank's actual performance in relation to the plan and budget required by this Paragraph and shall 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.
   (d) The bank shall submit the written plan and budget to the Superintendent and Regional Director for their review and approval. The plan and budget shall be fully implemented thirty (30) days after such submission to the Superintendent and Regional Director. The board shall consider comments and adopt recommended changes no more than thirty (30) days from the receipt of any such comment from the Superintendent and/or the Regional Director. Such budget {{10-31-98 p.C-4596}}and its implementation shall be satisfactory to the Superintendent and the Regional Director as determined at its initial review and at subsequent examinations and/or visitations.

   [.18] 18. (a) No later than November 30, 1998, the Bank shall develop and adopt a written strategic plan consisting of long term goals designed to improve the condition of the Bank and its viability and strategies for achieving those goals. The strategic plan shall include, at a minimum:

   i) identification of the Bank's market area, including means by which the Board of Directors will seek to target that area;
   ii) established product lines with consideration given to risk diversification;
   iii) desired composition of balance sheet including means by which the Board of Directors will achieve the desired composition; and
   iv) methods of ensuring the viability of the Bank through positive earnings and/or sale or merger of Bank to achieve desired goals.