Federal Deposit
Insurance Corporation

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   [¶5024]FDIC Docket No. FDIC-83-132b (6-18-84).

   Bank ordered to cease and desist from unsafe or unsound banking practices that included the maintaining of inadequate capital and loan-loss reserves. The FDIC also restricted the lending powers of the bank's president and director by withdrawing his power to extend credit to borrowers in excess of a certain amount. (This decision was affirmed by the U.S. Court of Appeals for the Sixth Circuit, 770 F.2d 81 (1985)).

   [.1]Unsafe or Unsound Banking Practice—Statutory Standard
   An "unsafe or unsound practice" is one that is contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder.

   [.2]Lending and Collection Policies and Procedures—Excessive Risk of Loss
   When a bank makes unsecured loans without first getting adequate financial information, makes loans without adequate security, fails to establish and enforce realistic programs for the repayment of loans, or makes secured loans without complete supporting documentation, it incurs an extra risk that the loan will not be repaid, and thereby presents an abnormal risk of loss to the bank and its shareholders. Each of these activities is an unsafe or unsound banking practice.

   [.3]FDIC—Rulemaking Authority
   Banking agencies have the authority to fashion relief in a form to prevent future abuses.

   [.4]Cease and Desist Orders—Additional Capital Ordered
   If a bank is operating in an unsafe or unsound condition, and the condition is attributable to an inadequate level of capital, the appropriate regulatory agency may require the bank to raise its capital to an acceptable level.

   [.5]Cease and Desist Orders—Defenses—Cessations of Violating
   The FDIC may issue a cease and desist order solely on the basis that the bank has engaged in violations of law, even when the violations have already been corrected, if the purpose of the order is to assure that the violations do not recur.

   [.6]Cease and Desist Orders—When Appropriate
   It is lawful to issue a cease and desist order as a means of rectifying the conditions currently affecting the bank.

   [.7]Cease and Desist Orders—Lending Authority Restricted
   FDIC may compel a bank to remove a director's lending powers as a corrective measure authorized by Federal Deposit Insurance Act §8(b)(1)[¶2002]. The FDIC may require a bank to take affirmative action to correct the conditions resulting from violations of law or unsafe or unsound banking practices.

   [.8]Cease and Desist Orders—Effective date
   Cease and desist orders become effective at the expiration of 30 days after service. 12 C.F.R. §308.36(b), [¶2136].

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   [.9]Capital—Adequacy—Reflection of Risk
   Ordinarily, the FDIC considers a 5% capital ratio to be adequate protection against loan loss. But that ratio is appropriate for sound banks, not for ones that have suffered losses and continue to be exposed to unusually high risks. In the latter cases, a higher level of capital is appropriate.

   [.10]Cease and Desist Orders—When Appropriate
   A cease and desist order may be issued when a bank is, has, or is about to engage in an unsafe or unsound practice or, when a bank is, has, or is about to violate a law, rule, or regulation.

In the matter of: * * * BANK OF * * *
COUNTY (FORMERLY CITY AND
COUNTY BANK OF * * * COUNTY)
* * * (INSURED STATE
NONMEMBER BANK)


DECISION AND ORDER TO CEASE
AND DESISTFDIC-83-132b

STATEMENT OF THE CASE

   On June 8, 1983, the FDIC issued a Notice of Charges and of Hearingagainst the * * * Bank of * * * County, * * * ("the Bank"). The FDIC charged that the Bank had engaged in improper lending and collection practices, and had failed to maintain adequate capital and loan-loss reserves. The FDIC also charged that the Bank had violated state and federal laws limiting aggregate loans¹to individuals.
   The FDIC proposed a cease-and-desist order. The Proposed Order called for the Bank to modify its lending policies and practices, to maintain adequate reserves for loan losses, to increase capital to 7.5 percent of adjusted total assets, and to improve the Bank's internal procedures. The Proposed Order also called for the Bank to provide management acceptable to the FDIC and to remove all lending authority from Mr. * * *, president of the Bank.
   Administrative Law Judge Donald W. Mosser held hearings from September 26 through 28, 1983. He issued his Recommended Decisionon February 28, 1984. Both sides have filed exceptions.

THE ISSUES

   Judge Mosser formulated the issues as follows:
   1. whether unsafe and unsound banking practices and violations of law, rule and regulation have occurred and, if so, whether a cease and desist order should be issued;
   2. whether the provision in the proposed cease and desist order requiring the removal of * * *'s lending authority is supported by law; and,
   3. whether the respondent should be required to maintain total equity and capital reserves at not less than 7.5 percent of adjusted total assets during the time required in the proposed cease and desist order.
   Neither the FDIC staff nor the Bank objects to this statement of the issues. The Board considers that they properly incorporate all the questions presented by the parties. Accordingly, the Board adopts Judge Mosser's formulation.

THE FACTS

I. Judge Mosser's Findings as Adopted by the Board

   Judge Mosser summarized the record in thirty-seven recommended Findings of Fact. Neither the FDIC staff nor the Bank objects to any of Judge Mosser's recommended Findings. The Board adopts all of them but one.
   The Board declines to adopt Judge Mosser's Finding #35. That Finding reads:

   35. The Bank's net equity capital (capital less adversely classified assets) was a negative $1,742,000 as of January 31, 1983. By April 30, 1983, the Bank's net equity capital was a negative $2,247,000. From the period January 31, 1983 through June 30, 1983, the Bank expensed $2,375,000 for loan losses which

resulted in it reporting a loss of $1,493,000 for the first six months of 1983.

   35. The Bank's net equity capital (capital less adversely classified assets) was a negative $1,742,000 as of January 31, 1983. By April 30, 1983, the Bank's net equity capital was a negative $2,247,000. From the period January 31, 1983, through June 30, 1983, the Bank expensed $2,527,000 for loan losses which resulted in it reporting a loss of $1,662,000 for the first six months of 1983.

   38. Mr. * * * knew of an illegal transaction and failed to bring the transaction to the attention of his fellow directors.
   39. Mr. * * * misled the FDIC or directed a Bank officer to communicate to the FDIC in a way that was intended to mislead the FDIC.

II. The Bank's Exceptions to Judge Mosser's Findings of Fact

   The Bank does not formally challenge any of Judge Mosser's findings. But in its Exceptions to Judge Mosser's Recommended Decision, the Bank asserts several facts that do not appear in Judge Mosser's Findings:
   —* * * and * * * acquired the Bank as trustees for a bank holding company to be formed (which was formed).
   —The Bank entered into a management contract with * * * Corporation, a company owned and controlled by * * *.
   —* * * was elected chairman of the board and chief executive officer of the Bank.
   —Mr. * * * hired Mr. * * * to serve as the Bank's president.
   —Mr. * * * told Mr. * * * that Mr. * * * was to manage the Bank's local affairs, and that Mr. * * * himself would make and approve out-of-area loans and participations.
   —Mr. * * * approved these loans in * * *.³
   —Mr. * * * told the Bank's board of directors that all out-of-area loans would be sound.
   —Mr. * * * approved the out-of-area loans criticized by the FDIC examiners during the January examination.⁴
   —The Bank funded the loans out of its correspondent account at * * * Bank of * * * County (* * *.).⁵
   —The Bank asked for information on criticized loans from the originating banks, and also from the FDIC (which is the receiver for some of those banks), but that neither the banks nor the FDIC supplied the information.

CONCLUSIONS OF LAW

I. Unsafe or unsound practices

A. Meaning of the phrase "unsafe or unsound"

   [.1] Judge Mosser reviews the meaning of the phrase "unsafe or unsound practice" as used in Section 8(b)(1). Neither side challenges his analysis. The Board adopts Judge Mosser's view that an "unsafe or unsound practice" is one that is contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder. See First National Bank of Eden v. Department of the Treasury568 F.2d 610, 611 (8th Cir. 1978); First National Bank of La Marque v. Smith610 F.2d 1258 (5th Cir. 1980); see also Financial Institutions Supervisory and Insurance Act of 1966: Hearings on S. 3158 Before the House Comm. on Banking and Currency, 89th Cong., 2d Sess., 49-50 (1966) (Memorandum of John E. Horne, Chairman of the Federal Home Loan Bank Board).

B. Lending practices

   [.2] Judge Mosser concludes that the Bank engaged in the following activities:
   —Making unsecured loans without first getting adequate financial information on all obligors;
   —Making loans that were not adequately secured;
   —Failing to establish and enforce realistic programs for the repayment of loans; and
   —Making secured loans without complete supporting documentation, such as appraisals, evidence of title, borrowing authorizations, collateral assignments or evidence of insurance.
   Judge Mosser characterizes each of these activities as an "unsafe or unsound practice". The Bank does not challenge Judge Mosser's characterization.
   When a bank engages in any of these activities, it incurs an extra risk that the loan will not be repaid, and thereby presents an abnormal risk of loss to the bank and its shareholders. See First National Bank of Eden v. Department of the Treasury, supra, 611. Judge Mosser's Findings of Fact, as accepted by the Board, show that the Bank engaged in these activities.
   The Board therefore adopts Judge Mosser's recommended conclusion that the Bank engaged in an "unsafe or unsound practice" within the meaning of Section 8(b)(1) of the FDI Act by engaging in each of these activities.

C. Classified loans

   Judge Mosser asserts, "(T)he Bank obviously has acted in an unsafe and unsound manner with respect to each of the loans that the FDIC adversely classified as of January 31, 1983." The Bank does not except to this assertion.
   Each of the loans in question is of low quality, or is secured by property worth less than the amount of the loan, or lacks an appropriate repayment schedule, or has been made without the benefit of appropriate supporting documents.
   The Bank itself has admitted that it engaged in "unsafe or unsound banking practices" in the case of several of these loans. See First State Bank of Wayne County, et al. v. City and County Bank of Knox County, et al.
{{4-1-90 p.A-226}}No. 83-141 (now pending before the United States District Court for the Eastern District of Kentucky). The Bank has not rebutted those allegations in this case. Cf. Enquip, Inc. v. Smith-McDonald Corp.655 F.2d 115 (7th Cir. 1981) (vacating summary judgment based on such pleadings, where the trial judge had rejected appellant's attempt to introduce evidence rebutting his own pleadings filed elsewhere); Fidelity & Deposit Insurance Co. of Maryland v. Hudson United Bank, 493 F.Supp. 434 (D. N.J. 1980). Accordingly, the Bank's admissions are accepted as factual. See Mitchell v. Fruehoff Corp., 568 F.2d 1139 (5th Cir. 1978), reh. denied, 570 F.2d 1391 (5th Cir. 1978); Frank R. Jelleff, Inc. v. Braden, 223 F.2d 671 (D.C. Cir. 1956).
   The Board therefore adopts Judge Mosser's recommended conclusion that the Bank engaged in an "unsafe or unsound practice" within the meaning of Section 8(b)(1) in the course of making each of the loans classified adversely on January 31, 1983.

D. Loan-loss valuation reserves

   As of January 31, 1983, the Bank had $4,724,000 in adversely classified loans. By contrast, the Bank's loan-loss reserve was a mere $152,000.
   The Bank's loan-loss reserve was far too small to accommodate the volume of loan losses that the Bank could expect to sustain. The Bank was therefore subject, on January 31, 1983, to the risk of a substantial charge against earnings.
   Judge Mosser concluded that the Bank's failure to maintain an adequate reserve for possible loan losses constitutes an unsafe or unsound practice within the meaning of Section 8(b)(1). The Bank does not except to this conclusion. The Board therefore adopts Judge Mosser's conclusion.

E. Capital adequacy

   As of January 31, 1983, the Bank's adversely classified loans represented 158.42 percent of its total equity capital and reserves.
   The Bank's capital did not provide adequate protection against losses that the Bank could reasonably expect to sustain. The Bank was therefore subject, on January 31, 1983, to a substantial risk of failure.
   Judge Mosser concluded that the Bank's failure to maintain an adequate level of capital constitutes an unsafe or unsound practice within the meaning of Section 8(b)(1). The Bank did not except to this conclusion. The Board adopts Judge Mosser's recommended conclusion.

II. Violations of law, rule or regulation

A. Regulation O—maintenance of records

   Regulation O of the Board of Governors of the Federal Reserve System provides:

   Each member bank shall maintain records necessary for compliance with the requirements of this part. These records shall (a) identify all executive officers, directors and principal shareholders of the member bank and the related interests of these persons and (b) specify the amounts and terms of each extension of credit by the member bank to these persons and to their related interests. Each member bank shall request at least annually that each executive officer, director or principal shareholder of the member bank identify the related interests of that person. 12 C.F.R. §215.7.

B. Regulation O—insider loans

   Judge Mosser says the Bank violated Regulation O by lending more than $25,000 to interests related to * * * , a director of the Bank, without the prior approval of the Bank's board of directors. See 12 U.S.C. §375(b)(2); 12 C.F.R. §215.4(b). Judge Mosser asserts that the Bank's loan to * * * , dated November 26, 1982, constituted the violation.
   The Bank does not challenge Judge Mosser's ruling. Nevertheless, the Board declines to adopt Judge Mosser's recommendation. The Board concludes that the record does not provide adequate support for it.
   * * * was a general partnership comprising eight corporations and a limited partnership. Mr. * * * was president of seven of the eight corporate partners and general partner of the limited partnership. Judge {{4-1-90 p.A-227}} Mosser infers that * * * was a "related interest" of Mr. * * *. The inference in improper.
   Regulation O defines a "related interest" as "a company that is controlled by a person." 12 C.F.R. §215(k). Regulation O provides that someone "controls" a company when the person can vote 25 percent of its securities, or can control the election of a majority of its directors, or can exercise a controlling influence over its management or policies. 12 C.F.R. §215.2(b)(1). In addition, Regulation O further provides that someone may be presumed (rebuttably) to control a company if the person can vote 10 percent of its securities and either (i) no one else has the power to vote a greater percentage of the company's securities, or (ii) the person is an executive officer of the company. 12 C.F.R. §215.2(b)(2).
   The record does not establish that Mr. * * * controlled * * * in any of these ways. Mr. * * * had no direct ownership interest in * * * in his own right. There is no testimony that he occupied an executive position in * * * that might have enabled him to control * * *'s management or policies.⁶Likewise, there is no testimony that he controlled * * * indirectly by controlling one⁷or more of the partners in * * * .⁸

C.* * * law—loans exceeding 30 percent of capital and surplus

   * * * law provides that a bank may not make aggregate loans to any person in an amount exceeding 30 percent of the bank's paid-in capital and actual surplus ("30 percent rule"). * * * Rev. Stat. Ann.§287.280(3). Loans made "for the benefit" of a person are included in the total liabilities of that person. * * * Rev. Stat. Ann.§287.280(4).
   The Bank had $1,000,000 in paid-in capital and actual surplus. Loans aggregating more than $300,000 would violate the 30 percent rule.
   The Bank allowed * * * to become indebted to the Bank in the amount of $600,000. The Bank lent $300,000 to Mr. * * * and * * * on June 30, 1982. The Bank then lent another $300,000 to Mr. * * * on September 30, 1982. Judge Mosser concludes that the Bank violated * * * law by doing so. The Board adopts Judge Mosser's recommended conclusion. The Bank allowed * * * to become indebted to the Bank in the amount of $400,000. The Bank lent $300,000 to Mr. * * * and Mr. * * * on June 30, 1982. The Bank lent another $100,000 to * * * on October 19, 1982.⁹Judge Mosser concludes that the Bank violated * * * law by doing so. The Board adopts Judge Mosser's recommended conclusion.
   The Bank allowed * * * to become indebted to the Bank in the amount of $550,000. The Bank acquired a loan participation of $300,000 in the name of * * * on August 17, 1982. The Bank lent $200,000 to Mr. * * * himself the next day, and also lent $50,000 to * * * on October 29, 1982.¹⁰Judge Mosser concludes that the Bank violated * * * law by doing so. The Board adopts Judge Mosser's recommended conclusion.
   On the other hand, Judge Mosser concludes that the Bank did not violate the 30 percent rule when making a series of loans January 5, 1983.¹¹The loans aggregated $800,000; an FDIC examiner determined

D.* * * law—loans exceeding 20 percent of capital and surplus

   * * * law specifies that a bank may not make aggregate loans to any person in an amount exceeding 20 percent of the bank's paid-in capital and actual surplus unless the loans are secured by assets worth more than the loans ("20 percent rule"). * * * Rev. Stat. Ann.§287.280(1). Loans made "for the benefit" of a person are to be included in the total liabilities of that person. * * * Rev. Stat. Ann.§287.280(4).
   The bank has paid-in capital and actual surplus of $1,000,000. Loans aggregating more than $200,000 would violate the 20 percent rule.
   The Bank allowed * * * to become indebted to the Bank in the amount of $400,000 without adequate security. The Bank lent Mr. * * * and * * * $300,000 on June 30, 1982. The loan was not fully secured. The Bank then lent $100,000 to * * * on October 19, 1982. The loan was not secured. Judge Mosser concludes that the Bank violated * * * law by doing so. The Board adopts Judge Mosser's recommended conclusion.
   The Bank allowed * * * to become indebted to the Bank in the amount of $550,000 without adequate security. The Bank acquired a loan participation of $300,000 in the name of * * * on August 17, 1982. The loan to * * * was not fully secured. The Bank then lent $200,000 to Mr. * * * on August 18, 1982, and another $50,000 to * * * on October 29, 1982. The loans to Mr. * * * and * * * were not secured. Judge Mosser concludes that the Bank violated * * * law by doing so. The Board adopts Judge Mosser's recommended conclusion.
   The Bank allowed * * * to become indebted to the Bank in the amount of $300,000 without adequate security. The Bank lent $300,000 to * * * on October 29, 1982. Mr. * * * guaranteed the loan. The loan was not fully secured. Judge Mosser concludes that the Bank violated * * * law by doing so. The Board adopts Judge Mosser's recommended conclusion.
   The Bank allowed * * * to become indebted to the Bank in the amount of $300,000 without adequate security on January 5, 1983, when the Bank acquired a participation of $300,000 in a loan to * * * . The loan was not secured. Judge Mosser concludes that the Bank violated * * * law by doing so. The Board adopts Judge Mosser's recommended conclusion.

E.* * * law—loans exceeding 10 percent of capital

   * * * law specifies that a bank may not make aggregate loans to any person in an amount exceeding 10 percent of the bank's paid-in capital and actual surplus unless the excess of the loan over that 10 percent limit is secured by collateral worth at least twice as much as that excess ("10 percent rule"). * * * Rev. Stat. Ann.§287.280(2). Loans made "for the benefit" of a person are to be included in the total liabilities of that person. * * * Rev. Stat. Ann.§287.280(4).
   Judge Mosser finds that the Bank's paidin capital totalled $200,000. Loans aggregating more than $20,000 would violate the 10 percent rule.
   The Bank allowed * * * to become indebted to the Bank in the amount of $200,000. The Bank lent money to * * * Company on November 26, 1982. Mr. * * * was president of all eight corporate partners in * * * and a general partner of the limited partnership that was the ninth partner in * * * . The loan was not secured. Judge Mosser concludes that the Bank violated * * * law by doing so.
   * * * law does not speak of "related interests" of a person (as does Regulation O), but rather of "obligations entered into for the benefit" of that person. In view of Mr. * * * 's position as general partner in an entity that was itself a general partner in * * * , the Board infers that the funds lent to * * * inured to Mr. * * * benefit. The Board adopts Judge Mosser's recommended conclusion.

III. Maintenance of a capital ratio of 7.5 percent.

   Judge Mosser concludes that, in view of the evidence, the FDIC may issue an order requiring the Bank to maintain a capital {{4-1-90 p.A-229}}level of 7.5 percent. The Bank does not challenge this conclusion.
   Judge Mosser notes that a primary purpose of bank capital is to provide a reserve against losses. He finds that the Bank's net equity capital was too little to protect the Bank adequately against losses, and that as a result the Bank was engaging in an unsafe or unsound banking practice. Relying on the testimony of the FDIC's expert witness, he finds that a capital ratio of 7.5 percent would provide sufficient capital to cover the Bank's substandard assets. He finds the testimony of the expert witness to be credible, uncontradicted, and supported by the evidence.¹²The Board adopts these observations as its own.

   [.3—.4] Generally speaking, banking agencies have authority to fashion relief in such a form to prevent future abuses. Groos National Bank v. Comptroller of the Currency, 573 F.2d 889 (5th Cir. 1978). If a bank is operating in an unsafe or unsound condition, and the condition is attributable to an inadequate level of capital, the appropriate regulatory agency may require the bank to raise its capital to an acceptable level. 12 U.S.C. §3907; cf. First National Bank of Bellaire v. Comptroller of the Currency, supra(finding that the Comptroller of the Currency had failed to establish a rational connection between the evidence adduced in the hearing and the requirement that a bank maintain a certain level of capital, but not categorically rejecting capital requirements as allowable forms of relief).
   The Bank does not except to Judge Mosser's conclusion that the FDIC has power to issue an order specifying that the Bank must maintain a capital level of 7.5 percent. The Board adopts Judge Mosser's conclusion.

IV. Propriety of a cease-and-desist order

   Judge Mosser concludes that it is lawful to issue a cease-and-desist order under the circumstances of this case. The Bank contends that no such order should be issued, because the improper practices and violations of law have been discontinued. The Board adopts Judge Mosser's conclusion.

   [.5] The FDIC may issue a cease-and-desist order solely on the basis that the Bank has engaged in violations of law, even when the violations have already been corrected, if the purpose of the order is to assure that the violations do not recur. See First National Bank of Bellaire v. Comptroller of the Currency, supra, 681 & 683. That is the purpose of the order in this case.

   [.6] In any event, the Bank continues to suffer adverse effects resulting from the unsafe or unsound practices of the past—e.g., the continued presence of a number of the adversely classified loans on the Bank's books. The Board concludes that it is lawful to issue a cease-and-desist order as a means of rectifying the conditions currently affecting the Bank. Id.
V. Removing Mr. * * * 's lending powers and installing a new chief executive

   In the Notice, the FDIC proposed to issue an order that would compel the Bank to "remove all lending authority from its chief executive officer, * * * ." The order would also compel the Bank to "provide and continue to retain management acceptable to the Regional Director and the Commissioner," including "a qualified chief executive officer." The order specified that the chief executive officer would also be responsible for making loans.
   Judge Mosser rejects the proposal. He says that such an order "would in substance necessitate the Bank's removal of * * * as its president," and that Section 8(b) does not grant the power to issue an order of this kind.
   Judge Mosser points out that, while the FDI Act makes specific provision for enforcement actions against bank directors, officers, and employees, it does so in Section 8(e) rather than in Section 8(b). He

   [.7] The FDIC staff takes exception to Judge Mosser's conclusion. The FDIC staff contends that the directive to the Bank compelling it to remove Mr. * * * 's lending powers is a corrective measure authorized by Section 8(b)(1). That section enables the FDIC to require a bank to take affirmative action to correct the conditions resulting from violations of law or unsafe or unsound banking practices.
   The FDIC staff further contends that the sanctions pertaining to Mr. * * * are needed to correct the Bank's loan portfolio problems. In the FDIC staff's view, Mr. * * * is not likely to comply with sound banking procedures and with legal lending limits. In addition, the FDIC staff believes that Mr. * * * is not likely to provide accurate information to the FDIC, and that the lack of accurate information would compromise the FDIC's efforts to monitor the Bank's condition. The FDIC staff bases its conclusions on the following observations:

   —Mr. * * * was involved in accepting many of the Bank's adversely classified extensions of credit.
   —Mr. * * * knew of an illegal transaction, yet failed to advise the other directors of the Bank or the Bank's supervisory agency.
   —Mr. * * * deliberately engaged in actions that were designed to communicate misleading information to the FDIC about one of the Bank's transactions.

THE ORDER

I. Effective Date of the Order

   [.8] Judge Mosser's Recommended Ordersets an effective date of 10 days after service on the Bank. The FDIC's regulations provide, however, that cease-and-desist orders become effective at the expiration of 30 days after service. 12 C.F.R. §308.36(b). Accordingly, the Board's Final Order modifies the Recommended Orderby setting the effective date at 30 days after service.

II. Bank Procedures Required by the Order

   The Bank contends that as a practical matter there is no need for at least two of the order's provisions. First, the Bank says that its collection procedures—that is, its procedures for obtaining the payment of overdue loans—are perfectly adequate as they stand. The Bank objects to the provision requiring it to amend its written lending policy, and to provide in the amendment for the "development of effective collection procedures."
   The Board considers the provision to be appropriate, however. The Bank vastly increased its loan-loss reserve in the first six months of 1983, and incurred a large loss during that interval as a result. These circumstances suggest that the Bank should take extra pains to see that loans are collected properly, and that the FDIC should supervise the Bank's efforts.
   The Bank also objects to the provision requiring the Bank to "request financial information, evidence of title, borrowing authorization, proof of insurance, and collateral assignments for all extensions of credit lacking them as of January 31, 1983." The Bank says that it has already taken all available action to obtain the information specified in the order. It admits, {{4-1-90 p.A-231}}    however, that it has not been entirely successful in its efforts.
   The Board considers that this provision is appropriate as well. The Bank has a task remaining unfulfilled the completion of which is necessary to correct an unsafe or unsound condition: namely, the inadequate documentation of loans. The provisions of the order encourage the Bank to pursue the task with vigor and to complete it with dispatch.

   III. Bank Capital Required by the Order

   Judge Mosser's Recommended Ordercommands the Bank to maintain a capital level of 7.5 percent. The Bank does not challenge this requirement.

   [.9] The Bank's net equity capital was negative on January 31, 1983, and still more so on June 30, 1983. The net equity capital was not sufficient to provide an adequate cushion against loan losses not otherwise provided for (e.g., by loan-loss reserves). In Judge Mosser's view, this condition amounted to an unsafe or unsound practice on the part of the Bank. He concludes that an order requiring the Bank to increase its capital is an appropriate remedy under the circumstances of this case. The Board agrees with his evaluation.
   Judge Mosser further considers that the appropriate level of capital for the Bank would be 7.5 percent of total assets. A capital ratio of 7.5 percent sets capital at a level that is at least equal to the Bank's substandard assets for which no loan-loss valuation reserves have been established. Ordinarily the Board considers a 5 percent capital ratio to be adequate protection. But that ratio is appropriate for sound banks, not for ones that have suffered losses and that continue to be exposed to unusually high risks. In the latter cases, a higher level of capital is appropriate. Accordingly the Board adopts Judge Mosser's recommendation that the Bank be required to maintain a capital ratio of 7.5 percent.

IV. Changes in Management Required by the Order

   The Board has determined to incorporate an additional set of provisions into the Order, as follows:

   (a) Upon the effective date of this ORDER, the Bank shall restrict the lending authority of Mr. * * * by withdrawing from him the power to extend credit or a line of credit to, or for the benefit of, any borrower or group of borrowers in an amount that, when aggregated with the amount of all other extensions of credit and lines of credit by the bank to, or for the benefit of, that borrower or group of borrowers, exceeds $25,000. The Bank may authorize Mr. * * * to extend credit or a line of credit exceeding $25,000 in any individual case where the Bank's board of directors has specifically considered the particular extension of credit or line of credit in advance, and where a majority of the full membership of the Bank's board of directors has specifically approved the particular extension of credit or line of credit in advance.
   (b) Within three months from the effective date of this ORDER, the Bank shall provide and continue to retain management acceptable to the Regional Director and the Commissioner. Such management shall include a qualified chief executive officer who shall be given stated written authority by the Bank's board of directors for the administration of the Bank's affairs. Such written authority shall include responsibility for implementing and maintaining adherence to all Bank plans and policies adopted by the Bank's board of directors relative to lending, investing, funds management, and general bank administration. The chief executive officer shall also be responsible for the lending functions.

{{4-1-90 p.A-232}}

   By order of the Board of Directors of the FDIC, dated June 18, 1984.

/s/ Hoyle L. Robinson
Executive Secretary

Date Issued: February 28, 1984 FDIC-83-132b

BEFORE: Donald W. Mosser

Administrative Law Judge

RECOMMENDED DECISION

   On June 8, 1983 the Federal Deposit Insurance Corporation (hereinafter FDIC) issued and served upon the respondent, * * * Bank of * * * County (Formerly * * * County Bank of * * * County, * * *) a Notice of Charges and of Hearing pursuant to Section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b). The Notice charged that respondent with engaging in unsound and unsafe banking practices. It also alleged violations of law, rule, or regulation, by the respondent in violating Section 22(b)(2) of the Act, Sections 215.4(b) and 215.7 of Regulation O of the Board of Governors of the Federal Reserve System and Section 287.280(1), (2) and (3) of the * * * Revised Statutes. An answer dated August 9, 1983 was filed by the respondent in which each charge was denied and several defenses were asserted.
   A formal hearing was held in this matter at * * * , beginning on September 26, 1983 and concluding on September 28, 1983.
   By these proceedings, the FDIC has proposed and is seeking a cease and desist order to, in part, bar the respondent from continuing the alleged unsound and unsafe banking practices and violations of law, rule and regulation. Also pertinent to this controversy, the FDIC seeks in its proposed order to remove all lending authority from the respondent's current president, essentially approve the selection of new management and require the respondent to maintain a percentage of 7.5 of total equity capital and reserves to its adjusted total assets.

Issues

   The issues to be decided in this case are essentially three:

   1. whether unsafe and unsound banking practices and violations of law, rule and regulation have occurred and, if so, whether a cease and desist order should be issued:
   2. whether the provision in the proposed cease and desist order requiring the removal of * * * 's lending authority is supported by law; and,
   3. whether the respondent should be required to maintain total equity and capital reserves at not less than 7.5 percent of adjusted total assets during the time required in the proposed cease and desist order.

   I find the following facts based upon the entire record including the pleadings, stipulation, evidence and the proposed findings of fact and conclusions submitted by the parties.
   1. The * * * Bank of * * * County (hereinafter sometimes referred to as * * * Bank * * * ) a corporation existing and doing business under the laws of the * * * and having its principal place of business in * * * , is and has been, at all times pertinent to this proceeding, an insured State nonmember bank. The Bank is thereby subject to the Act, 12 U.S.C. §§1811, et seq., and the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III. The FDIC has jurisdiction over the Bank and the subject matter of the proceeding.
   2. On or about May 17, 1982, control of the Bank was acquired by * * * and * * *. On or about May 19, 1982, * * * , along with * * * , * * * , * * * , * * * and * * * became directors of the Bank. (Stipulation, p. 3).
   3. * * * was president and a director of the Bank at all relevant times. He was appointed chief executive officer in January of 1983, but he executed some documents of the Bank prior to that date in which it was represented that he held that position. (Exs. 6, 7, 38, 39; Tr. 15, 18, 23, 146, 153, 420).
   4. At all times relevant to this proceeding, the loan limits of * * * and * * * , as set by the Bank's board of directors, were:

   * * * and * * * had a combined loan limit of $200,000.00 secured and $300,000.00 unsecured. (Ex. 39).
   5. An examiner of the FDIC conducted a regular examination of the Bank as of the {{4-1-90 p.A-233}}close of business on August 23, 1982. (Ex. 2-B; Stipulation, p. 3). It was brought to Mr. * * * 's attention that the Bank apparently was in violation of Section 287.230(3) of the * * * Revised Statutes as it had exceeded its legal limit for loans to a certain individual. Mr. * * * placed a phone call to * * * Bank of * * * and was told that the problem would be corrected there. * * * Bank maintained a correspondent account as well as federal funds on deposit at * * * Bank of * * * County, * * * (Stipulation, p. 3; Tr. 126–130, 428–430).
   6. There were no loans cited for technical exceptions¹during the August examination, though the examiner gave special mention to those loans that were concentrated outside the Bank's normal lending area and were contrary to the Bank's established lending policies. Also, the Bank's valuation reserve of $83,400.00 was noted as inadequate to charge off the $112,900.00 classified loss at that examination. President * * * indicated that sufficient provision would be made to the reserve to allow for the charge-off of the loans classified loss and that additional provision would be made to bring the reserve to at least one percent of total loans by year end. (Stipulation, p. 3; Exhibit 2-B).
   7. Another examiner of the FDIC conducted a regular examination of the Bank as of the close of the business day of January 31, 1983. The examiner reported that loan assets subject to adverse classification²had shown a dramatic increase from the August 23, 1982 examination and were considered to be at "hazardous levels". Statistics pertinent to the adverse classifications as of January 31, 1983 and the two previous FDIC examinations of the Bank are shown below:

   8. Of the $4,976,000 in loans subject to special mention or substandard classification as of January 31, 1983, $4,449,000 represents credit extended to borrowers outside the Bank's trade area. Most of these loans were made to borrowers in the * * * area or close associates of individuals from that area. Of the total of the Bank's out-of-state loans, 68.68 percent were subject to adverse classification by the FDIC examiner as of January 31, 1983. (Ex. 3-C).
   9. As of January 31, 1983, 15.35 percent of total assets and 32.88 percent of total loans were adversely classified by the FDIC examiner. These represent respective increases of 1.61 percent and 3.6 percent from the August 23, 1982 examination. (Exs. 2-B, 3-C).
   10. The Bank increased its net loans by $6,495,000 during the 10 month period ending January 31, 1983. Of that amount, $6,041,000 represents loans outside the Bank's normal trade area of * * * County, and 42 percent of the Bank's total loan portfolio. The FDIC listed each of these loans for technical exceptions in the January 31, 1983 report of examination. (Ex. 3-C; Tr. 131).
   11. During the period beginning on June 25, 1982, and ending on January 5, 1983, the Bank extended the following credit remaining on its books as of January 31, 1983:

   12. Most of the adversely classified credits listed in paragraph 11 above represent participations in loans originating at either * * * Bank of * * * County or * * * Bank of * * * County, both of which are located in * * * . Other of the adversely classified credits represent 100 percent interest, or more specifically, direct loans to borrowers outside the Bank's normal trade area. (Exs. 9-47). The Bank lacked information such as current credit information, appraisals, evidence of title, or evidence of insurance on all of the loans set forth above. (Ex. 3-C; Tr. 190).
   13. The Bank did not maintain records either identifying all of its executive officers, directors and principal shareholders and the related interests of the persons or specifying the amounts and terms of each extension of credit of the Bank to these persons and their related interests. (Ex. 3-C).
   14. The financial information available to the Bank regarding its extensions of credit on June 25, 1982, to * * * and * * * Corporation, as listed above, was very limited and not current. These extensions also were made by the Bank without security or were based on security having a value determined to be less than the amount of credit extended. The extension of credit to * * * was made by the Bank without a program of loan repayment other than a due date. (Exs. 3-C, 9, 10, 11, 12, 13, 14, 15, 17, 18; Tr. 25, 26, 29, 35, 37–40).
   15. The Bank had no current financial information available to it at the time it granted the extension of credit to * * * and * * * on June 30, 1982, as listed above. This extension also was made by the Bank based on security having a value determined to be less than the amount of credit extended and the extension of credit, as well as the extension of credit to * * * , was

   29. The Bank made the following allegations in its complaint before the United States District Court, Eastern District of * * * in its cause of action against * * * Bank of * * * County, * * *, et al., Civil Action No. 83-141:

   a. the Bank's extensions of credit to * * * and * * * on June 25, 1982 were of low quality and the extensions of credit on that same date to * * * Corporation and * * * were undersecured;
   b. the extension of credit by the Bank on June 30, 1982 to * * * and * * * was undersecured;
   c. the Bank's extension of credit on September 30, 1982 to * * * was undersecured;
   d. the Bank's extension of credit on September 30, 1982 in the amount of $300,000 to * * * was above the Bank's loan limits when considered with its extension of credit to * * * of June 30, 1982;
   e. the extensions of credit on October 15, 1982 to * * * and * * * were undersecured; {{4-1-90 p.A-237}}
   f. the Bank's extension of credit on October 19, 1982 to * * * was undersecured and above the Bank's loan limits because * * * was a general partner and he was already obligated to the Bank for the $300,000 extension of credit on June 30, 1982;
   g. the Bank's extension of credit on October 21, 1982 to * * * , Trustee was of low quality;
   h. the extension of credit of October 29, 1982 by the Bank to * * * was above the Bank's loan limits as * * * was the sole proprietor of this entity and he was already obligated to the Bank for $200,000 on the August 18, 1982 extension of credit;
   i. the Bank's extension of credit to * * * and * * * of October 29, 1982 were undersecured; and,
   j. the extensions of credit of January 5, 1983 to * * * and * * * were undersecured and above the Bank's loan limits when considered together. (Ex. 5)

   33. As of January 31, 1983, the Bank's capital stock actually paid in and its actual amount of surplus were $200,000 and $800,000, respectively. (Ex. 3-C).
   34. An Assistant Director of the Division of Bank Supervision of the FDIC, * * * , who is an expert in matters related to problem bank situations and capital adequacy of banks, analyzed the FDIC's reports of examination pertaining to the Bank as of August 23, 1982, January 31, 1983 and April 30, 1983. The expert also examined the June 30, 1983 consolidated report of condition of the Bank. Mr. * * * essentially determined from his analysis of these records that a 7-1/2 percent ratio of the Bank's adjusted equity capital and reserves to its adjusted total assets would be appropriate as of January 31, 1983, considering the Bank's approximate size of $30,000,000 in total assets and Mr. * * * conclusion that the * * * Bank represents a "problem bank". (Tr. 303–326).
   35. The Bank's net equity capital (capital less adversely classified assets) was a negative $1,742,000 as of January 31, 1983. By April 30, 1983, the Bank's net equity capital was a negative $2,247,000. From the period January 31, 1983 through June 30, 1983, the Bank expensed $2,375,000 for loan losses which resulted in it reporting a loss of {{4-1-90 p.A-238}}$1,493,000 for the first six months of 1983. (Exs. 3-C, 4-D, 21, 51).

   36. Between the time of the examination on January 31, 1983 and the FDIC's next regular examination of the Bank on April 30, 1983, three of the Bank's directors had resigned, two of whom were * * * and * * * . (Exs. 3-C, 4-D, 39; Tr. 253-255, 481).

Conclusions of Law

   1. Whether unsafe and unsound banking practices and violations of law, rule or regulation have occurred and, if so, whether a cease and desist order should be issued.

a. Unsafe or unsound banking practices.

   It is provided in Section 8(b)(1) of the Federal Deposit Insurance Act (Title 12 U.S.C. §1818(b)(1)), in pertinent part:

   (b)(1) If, in the opinion of the appropriate Federal banking agency, any insured bank, bank which has insured deposits, or any director, officer, employee, agent, or other person participating in the conduct of the affairs of such a bank is engaging or has engaged,. . . in an unsafe or unsound practicein conducting the business of such bank, or is violating or has violated,. . . a law, rule, or regulation, or any condition imposed in writing by the agency . . . the agency may issue and serve upon the bank or such director, officer, employee, agent, or other person a notice of charges in respect thereof. The notice shall contain a statement of the facts constituting the alleged violation or violations or the unsafe or unsound practice or practices, and shall fix a time and place at which a hearing will be held to determine whether an order to cease and desist therefrom should issue against the bank or the director, officer, employee, agent, or other person participating in the conduct of the affairs of such bank. (emphasis added).

   . . . (d)espite the fact that the term `unsafe or unsound practices' has been used in the statutes governing financial institutions for many years, the Board is not aware of any statute, either Federal or State, which attempts to enumerate all the specific acts which could constitute such practices. The concept of `unsafe or unsound practices' is one of general application which touches upon the entire field of the operations of a financial institution. For this reason, it would be virtually impossible to attempt to catalog within a single all-inclusive or rigid definition the broad spectrum of activities which are embraced by the term. The formulation of such a definition would probably operate to exclude those practices not set out in the definition, even though they might be highly injurious to an institution under a given set of facts or circumstances or a scheme developed by unscrupulous operators to avoid the reach of the law. Contributing to the difficulty of framing a comprehensive definition is the fact that particular activity not necessarily unsafe or unsound in every instance may be so when considered {{4-1-90 p.A-239}}in the light of all relevant facts. Thus, what may be an acceptable practice for an institution with a strong reserve position, such as concentration in higher risk lending, may well be unsafe or unsound for a marginal operation.
   Like many other generic terms widely used in the law, such as `fraud,' `negligence,' `probable cause,' or `good faith,' the term `unsafe or unsound practices' has a central meaning which can and must be applied to constantly changing factual circumstances. Generally speaking, an `unsafe or unsound practice' embraces any action, or lack of action, which is contrary to generally accepted standards or prudent operation, the possible consequence of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds.

   As indicated above, an agency may issue and serve upon a bank a notice of charges under Section 8(b)(1) of the Act for violations of a law, rule or regulation. 12 U.S.C. § 1818(b)(1). Moreover, the agency, upon finding such a violation, has the discretion to take relief in such a manner as to prevent further abuses. Groos National Bank v. Comptroller of the Currency, 573 F.2d 889, 897 (5th Cir. 1978). The relief may be in the form of a cease and desist Order. First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 680 (5th Cir. 1983).
   In the notice of charges, the FDIC alleged the Bank violated Section 215.4(b) and Section 215.7 of Regulation O of the Board of Governors of the Federal Reserve System. 12 C.F.R. §§ 215.4(b) and 215.7. Considering the latter section first, Section 215.7 provides:

   Each member bank shall maintain records necessary for compliance with the requirements of this part. These records shall (a) identify all executive officers, directors and principal shareholders of the member bank and the related interests of these persons and (b) specify the amounts and terms of each extension of credit by the member bank to these persons and to their related interests. Each member bank shall request at least annually that each executive officer, director or principal shareholder of the member bank identify the related interests of that person.
   12 C.F.R. § 215.7.

   ...No member bank may extend credit or grant a line of credit to any of its executive officers, directors, or principal shareholders or to any related interest of that person in an amount that, when aggregated with the amount of all other extensions of credit and lines of credit by the member bank to that person and to all related interests of that person exceeds $25,000, unless (i) the extension of credit or line of credit has been approved in advance by a majority of the entire board of directors of that bank....
   12 C.F.R. § 215.4(b).

   (1) No bank or trust company shall permit any person to become indebted to it or to become obligated as guarantor or surety to it in an amount exceeding 20 percent (%) of its capital stock actually paid in and its actual amount of surplus, unless such person pledges with it good collateral, security or executes to it a mortgage upon real or personal estate which at the time is of more than cash value of the indebtedness or obligation above all other encumbrances.
   (2) No bank or trust company shall permit any of its directors or officers to {{4-1-90 p.A-241}}become indebted or obligated as guarantor or surety to it in an amount exceeding 10 percent (%) of its capital stock actually paid in, without securing the excess by the mortgage or pledge of real personal property double in value the amount of the excess.
   (3) In no event shall the indebtedness or obligation of any person exceed 30 percent (%) of the paid-in capital and actual surplus of a bank or trust company.

c. Whether a cease and desist order should be issued.

   Since the evidence clearly demonstrates that * * * Bank engaged in unsafe and unsound bank practices and violated numberous laws, rules or regulations, it must next be decided whether the issuance of a cease and desist order is appropriate. Section 8(b)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(b) (1978), provides in pertinent part that a cease and desist order may be issued against any bank:

   ...[i]f upon the record made at any ...hearing, the agency shall find that any violation or unsafe or unsound practice specified in the notice of charges has been established.... Such order may ...require the bank...to cease and desist from the same, and, further, to take affirmative action to correct the conditions resulting from any such violation or practice.

   2. Whether the provision in the proposed cease and desist order requiring the removal of * * * 's lending authority is supported by law.

   (e)(1) Whenever, in the opinion of the appropriate Federal banking agency², any ...officer of an insured bank has committed any violation of law, rule or regulation...or has engaged or participated in any unsafe or unsound practice in connection with the bank, or has committed or engaged in any act, omission, or practice which constitutes a breach of his fiduciary duty as...[an] officer, and the agency determines that the bank has suffered or will probably suffer financial loss or other damage or that the interests of its depositors could be seriously prejudiced by reason of such violation or practice or breach of fiduciary duty...and that such violation or practice or breach of fiduciary duty is one involving personal dishonesty on the part of such...officer, or one which demonstrates a willful or continuing disregard for the safety or soundness of the bank, the agency may serve upon

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² The appropriate federal banking agency refers to the Comptroller of the Currency in the case of a national banking association; the Board of Governors of the Federal Reserve System in the case of a state member insured bank; and to the Federal Deposit Insurance Corporation in the case of a state non-member insured bank. 12 U.S.C. § 1813(q).
{{4-1-90 p.A-244}}such...officer a written notice of its intention to remove him from office.

   (4) In respect to any...officer of an insured bank...the appropriate Federal Banking agency may, if it deems it necessary for the protection of the bank or the interests of its depositors, by written notice to such effect served upon such...officer suspend him from office or prohibit him from further participation in any manner in the conduct of the affairs of the bank. ...(emphasis added).

   3. Whether the * * * Bank should be required to maintain total equity and capital reserves at not less than 7.5 percent of adjusted total assets during the time required in the proposed cease and desist order.

PROPOSED ORDER

   In view of the above findings of fact and conclusions of law, it is proposed that the Federal Deposit Insurance Corporation issue a Cease and Desist Order to the * * * Bank of * * * County (formerly * * * Bank of * * * County, * * *) providing:
   IT IS ORDERED, that * * * Bank of * * * County (formerly * * * Bank of * * * County), * * * , its directors, officers, employees, agents, or other persons participating in the conduct of the affairs of the Bank, CEASE AND DESIST, directly or indirectly, from the following unsafe and unsound practices and violations:
   1. extending unsecured credit without first obtaining adequate financial information on all obligors;
   2. extending credit that is not adequately secured;
   3. failing to establish and enforce realistic programs for the repayment of loans;
   4. extending credit without complete supporting documentation such as appraisals, evidence of title, or evidence of insurance;
   5. failing to make provisions for an adequate reserve for possible loan losses ("loan valuation reserve");
   6. operating with inadequate capital;
   7. violating Sections 215.4(b) and 215.7 of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. §§ 215.4(b) and 215.7), Section 22(h)(2) of the Federal Reserve Act (12 U.S.C. § 375(b)(2)), and Section 287.280 of the * * * Revised Statutes ( * * * § 287.280).
   IT IS FURTHER ORDERED:
   1. Upon the effective date of this ORDER, the Bank shall cease and desist from extending credit, as defined in Section 215.3 of Regulation O (12 C.F.R. § 215.3), without obtaining and analyzing the following:

   (a) where any credit in excess of $20,000 is or will be secured, a promissory note or lease and any documents necessary to perfect the Bank's lien and evaluate its priority and value, and, if the property is insurable, evidence of insurance covering the security in at least the amount of the loan with a loss payable clause in favor of the Bank;
   (b) where any credit in excess of $20,000 is or will be unsecured, or is or will be secured by corporate securities not readily marketable, or where the value of the security does not adequately support the credit, a promissory note and

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⁴ There was considerable discussion at the hearing as to the proper method of computing the ratio. (Tr. 340–351, 365). Mr. * * * testified that the amount of reserve for loan losses should be added in to arrive at adjusted total assets while the Bank counsel took a contrary position. Based on the fact that all the ratios computed during the various bank examinations included the amount of reserve for loan losses in adjusted total assets and based on Mr. * * * 's uncontradicted expert testimony, I find that adding that amount to adjusted total assets is the correct procedure. (See Exs. 1A, 2B, 3C, 4D, K, 51).
{{4-1-90 p.A-247}}current and complete credit and financial information as to all persons who will be obligated on the credit and all obligors whose not readily marketable securities will be pledged as security (as used herein, "financial information" includes statements of the condition, and in the case of business entities, earnings statements); and,
   (c) in addition to any promissory note required by paragraph (1) above, an agreement establishing a repayment program consistent with the credit's purpose, security and source of payment.

   (a) A defined primary trade area for lending, which shall include only the area within which the Bank can reasonably expect to establish a primary deposit relationship. Criteria for extensions of credit made outside the primary trade area shall include guidelines for the direct extension of or purchase of out-of-territory extensions of credit. Such guidelines shall include without limitation criteria for documentation, establishment of a limitation on the maximum volume of out-of-territory extensions of credit as a percentage of the portfolio of total assets, and procedures for loan committee or board of directors approval.
   (b) A requirement that applications be obtained for all loans and leases. The application shall describe the purpose of the credit, the means of repayment, and identify the officer closing the credit as well as any officer or director who participates in the transaction.
   (c) A requirement that before disbursement is made on any loan in excess of $50,000, the lending officer shall summarize in writing the pertinent facts of the loan such as purpose, source and terms of repayment, distribution of proceeds, collateral, the financial position of the borrower, compliance with the lending policy, and compliance with laws and regulations.
   (d) Lending authorities within the demonstrated expertise and capabilities of the Bank's lending officers. Such authorities shall provide for prior approval by the loan committee or the board of directors of larger lines of credit.
   (e) A requirement that specific repayment terms commensurate with the nature and purpose of the extension of credit be established upon the origination of the credit.
   (f) Formation of a loan committee, a majority of which shall be composed of local directors not employed by the Bank on a full time basis.
   (g) Establishment of specific criteria for unsecured extensions of credit.
   (h) Establishment of guidelines and procedures with respect to secured credit.
{{4-1-90 p.A-248}}
   (i) A requirement for board review of all lines of credit in excess of $100,000 on an annual basis.
   (j) A requirement that current financial information be obtained for all obligors prior to disbursement of funds and that financial information be maintained on a current basis for unsecured and marginally-secured credits.
   (k) Establishment of a maximum amount that may be loaned to one obligor and related interests.
   (l) Establishment of a list of the types of credits that are considered to be desirable based upon the expertise of management and local economic characteristics.
   (m) Development of effective collection procedures.
   (n) Adoption of loan interest nonaccrual procedures which conform with the Instructions for Preparation of Reports of Condition and Income published by the Federal Financial Institutions Examination Council.

   (i) the sale of equity capital for cash;
   (ii) the sale or collection of assets previously charged off;
   (iii) retention of earnings;
   (iv) any other means acceptable to the FDIC; or
   (v) any combination of the above means.