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{{4-1-90 p.A-446}}
   [5046] FDIC Docket No. FDIC-84-71(b) (5-28-85).

   Bank ordered to cease and desist from unsafe or unsound banking practices, including the following: extending credit without establishing and enforcing realistic payment programs; extending credit on inadequate security; extending credit without obtaining current and complete credit information; operating with an excessive level of adversely classified assets; operating without an adequate loan loss reserve; operating with inadequate liquidity; operating without adequate supervision by a board of directors; violating the statutory maximum lending limit; and operating with management whose practices are detrimental to the bank.

   [.1] Unsafe or Unsound Practices—Statutory Standard
   The Comptroller of the Currency suggests that unsafe and unsound banking practices encompass what may be generally viewed as conduct deemed contrary to accepted standards or banking operations that might result in abnormal risk or loss to a banking institution or shareholder.

   [.2] Lending and Collection Policy and Procedures—Unsafe or Unsound Practices—Lack of Repayment Program
   Failure of a bank to establish and enforce realistic programs for the repayment of loans is an unsafe or unsound banking practice.

   [.3] Lending and Collection Policy and Procedures—Unsafe or Unsound Practices—Inadequate Collateral
   Extending credit that is inadequately secured is an unsafe or unsound banking practice.

   [.4] Lending and Collection Policy and Procedures—Unsafe and Unsound Practices—Lack of Credit Information
   Extending credit without complete and current credit information is an unsafe or unsound banking practice.

   [.5] Lending and Collection Policy and Procedures—Loan Loss Reserve—Unsafe or Unsound Practices
   Failing to make provision for an adequate loan loss reserve is an unsafe or unsound banking practice.

   [.6] Liquidity—Unsafe or Unsound Practice
   Operating with inadequate liquidity is an unsafe or unsound banking practice.

   [.7] Loans—Classification of Adverse—Generally
   The classification of loans has been accepted by Congress in imposing restrictions on self-dealings by bank insiders.

   [.8] Federal Reserve Act §23A—Transactions with Affiliates—Transfer of Assets
   "Substandard" assets are included within Federal Reserve Act's Section 23A definition of "low quality asset" and thus Banks are prohibited from transfering such assets among affiliates.

   [.9] Directors—Duties and Responsibilities—Supervision of Bank's Affairs
   Bank directors have a duty of reasonable supervision, and they are not to be shielded from liability because of want of knowledge or wrongdoing, if that ignorance is the result of gross inattention.

   [.10] Directors—Duties and Responsibilities—Delegation to Officers
   It is negligent for directors to leave the management of a corporation entirely up to others.

   [.11] Directors—Duties and Responsibilities—Supervision of Bank's Affairs
   Directors have a duty to investigate when investigation is necessary to protect the interests of shareholders. A director is not excused from this duty because he lacks expertise.

{{4-1-90 p.A-447}}
   [.12] Cease and Desist Order—When Appropriate
   A cease and desist order is appropriate to prevent future unsafe or unsound banking practices and to protect a bank's shareholders.

In the Matter of * * * BANK * * *

(INSURED STATE NONMEMBER
BANK)
FDIC-84-71(b)
DECISION AND ORDER

STATEMENT OF THE CASE

   These proceedings arise under Section 8(b) of the Federal Deposit Insurance Act (the "Act"), 12 U.S.C. §1818(b). On April 18, 1984, the Board of Directors of the Federal Deposit Insurance Corporation (the "Board" and the "FDIC", respectively) issued a written Notice of Charges and of Hearing to * * * Bank, * * * (the "Bank" or "Respondent"), pursuant to Section 8(b) of the Act and Part 308 of the FDIC's Rules and Regulations, 12 C.F.R. Part 308. The Notice of Charges and of Hearing (the "Notice") charged the Bank with having engaged in unsafe or unsound banking practices and a violation of law. The Notice specifically alleged that the Bank engaged in the following unsafe or unsound practices and violation of law: (1) extending credit without establishing and enforcing realistic repayment programs, (2) extending credit on inadequate security, (3) extending credit without obtaining current and complete credit information, (4) operating with an excessive level of adversely classified assets, (5) operating without an adequate loan loss reserve, (6) operating with inadequate liquidity, (7) operating without adequate supervision by its board of directors, (8) violating the statutory maximum lending limit of * * *, and (9) operating with management whose practices and policies are detrimental to the Bank. The Notice sought an ORDER under Section 8(b)(1) of the Act, requiring the Bank to cease and desist from the unsafe or unsound practices and the violation of * * * law, and requiring the Bank to remedy the conditions resulting from these practices and the violation of * * * law.
   A formal hearing was held before Administrative Law Judge William A. Shue (the "ALJ"). Proposed Findings of Fact, Conclusions of Law, and Briefs were submitted by both parties, and the FDIC filed a Reply to Respondent's Suggested Findings of Fact and Conclusions of Law. The ALJ issued a Recommended Decision and Proposed ORDER on February 1, 1985, and the Bank submitted Exceptions to the Recommended Decision, Findings of Fact, and Conclusions of Law.
   In his Recommended Decision, Findings of Fact and Conclusions of Law, the ALJ made the following Findings of Fact: (1) the Bank had failed to establish and enforce realistic programs for the repayment of loans; (2) the Bank had extended credit that is inadequately secured; (3) the Bank extended credit to borrowers without complete and current credit information; (4) the Bank, as a consequence of its negligent collection practices, had operated with an excessive level of adversely classified assets; (5) the Bank entered into repurchase agreements whose effect was to obscure the Bank's violation of the * * * legal lending limit and deficiencies in the loan portfolio; (6) the Bank had operated with an inadequate loan loss reserve; (7) the Bank had operated with inadequate liquidity; (8) the Bank extended credit to * * * Bancshares in violation of the statutory lending limit of * * *; and (9) the Bank's directors were remiss in their supervision. The ALJ specially identified fifteen different loans involving credit extended without a realistic repayment program, twenty-six loans involving credit extended on inadequate security, and fifteen loans involving credit extended without current and complete credit information.
   On the basis of these Findings of Fact, the ALJ found that the Bank's practices, as enumerated in the Findings of Fact, constituted unsafe or unsound banking practices within the meaning of Section 8(b) of the Federal Deposit Insurance Act and a violation of * * * law.

OPINION

   The Board finds the ALJ's recommended Findings of Fact, with one minor exception discussed below, to be supported by substantial evidence in the record. We therefore, adopt and incorporate them herein by reference. The Board also agrees with the analysis of the law set forth in the ALJ's {{4-1-90 p.A-448}}Recommended Decision. We find that analysis to be supported both by statute and established precedent. Therefore, the Board hereby adopts and incorporates herein by reference the ALJ's Conclusions of Law.
   The one proposed finding of the ALJ that we do not adopt involves a loan to * * * allegedly granted by the Bank without adequate credit information. The ALJ found that the Bank possessed an "old" property statement on the borrower and an outdated financial statement. The record, however, contains uncontroverted testimony that the Bank obtained and provided an updated financial statement to the FDIC examiners prior to the conclusion of the October 14, 1983 examination. See * * * Tr. 723. The Board, therefore, finds that the ALJ's classification of the * * * loan is not supported by substantial evidence in the record and whatever defect that existed in the loan documentation was apparently corrected prior to the close of the October 14, 1983 examination.
   In both its brief and the Exceptions to the ALJ's Recommended Decision, Respondent generally alleged that the incompetency of FDIC examiners, the vagueness of FDIC's standards for safe and sound banking practices, and the subjectivity of the examination process, in conjunction with each other, produce an unreliable basis for finding that the Bank has engaged in unsafe or unsound practices. Additionally, Respondent proffered that the Cease and Desist ORDER was a penal and destructive measure. The Board, like the ALJ, having considered these arguments and allegations, finds them to be either not materially significant or not justified on the basis of the record in this proceeding. Indeed, the record establishes and this Board finds that the examiners conducting both the March 18, 1983 and the October 14, 1983 examinations of the Bank were well-trained, experienced and competent bank examiners. The record also establishes and we find that both examinations at issue herein were performed in a thorough and complete manner and in full compliance with the standards and policies of the FDIC. In any event, under any reasonable standards, the Bank was clearly engaged in unsafe and unsound banking practices.
   Having found that Respondent has engaged in unsafe or unsound banking practices as set forth in the ALJ's Recommended Decision, the Board finds the ALJ's Recommended Cease and Desist ORDER is appropriate both as a remedial measure and to prevent future abuses. Therefore, the Board adopts herein that ORDER, as set forth below, as its final ORDER in this proceeding.

ORDER

   Having found and concluded that Respondent has engaged in unsafe and unsound banking practices within the meaning of Section 8(b) of the Federal Deposit Insurance Act, the Board of Directors of the Federal Deposit Insurance Corporation now issues a Cease-and-Desist Order ("Order") to the * * * Bank, * * * providing:
   IT IS HEREBY ORDERED, that * * * Bank, * * *, its directors, officers employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, CEASE AND DESIST, directly or indirectly, from the following unsafe or unsound banking practices and the violation of * * * law:

    A. Extending credit without establishing and enforcing realistic programs for the repayment of loans;
       B. Extending credit that is inadequately secured;
       C. Extending credit without obtaining current and complete credit information;
       D. Operating with an excessive level of adversely classified assets;
       E. Operating without an adequate reserve for loan losses;
       F. Operating without adequate liquidity;
       G. Operating without adequate supervision by its board of directors;
       H. Violating * * * Statutes Annotated Section 9-1104(a) (Supp. 1983); and
       I. Operating with management whose policies and practices are detrimental to the Bank.

   IT IS FURTHER ORDERED, that * * * Bank, * * *, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, take affirmative action as follows:
   1. (a) Not later than 30 days from the effective date of this ORDER, the Bank shall provide, and thereafter continue to retain, management acceptable to the Regional Director of the FDIC's * * * Regional Office ("Regional Director") and the {{4-1-90 p.A-449}}State Bank Commissioner for the State of * * * ("Commissioner"). Such management shall include a qualified chief executive officer who shall be given authority in writing by the board of directors of the Bank, including the responsibility for implementing and maintaining lending and investment policies in accordance with sound banking practices.
   (b) Not later than 30 days from the effective date of this ORDER, the Bank shall submit to the Regional Director and to the Commissioner a management plan acceptable to the Regional Director and Commissioner. The plan shall require the board of directors of the Bank to review periodically the lending and investment authority for the Bank's officers and employees. The plan shall also include the requirement that the board of directors of the Bank, or a committee thereof consisting of not less than two outside directors, provide supervision over lending, investment, and operating policies of the Bank sufficient to reasonably ensure that the Bank complies with the provisions of this ORDER.
   (c) As used herein, the term "outside director" is defined as an individual not in the employ of the Bank who owns not more than 5 percent of the Bank's outstanding voting shares, who is not relying on the Bank as a source of credit, and who shall not be related by blood, marriage, or significant business relationship to any stockholder owning more than 5 percent of the Bank's outstanding voting stock.
    2. (a)(i) Not later than 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" and 50 percent of all assets classified "Doubtful" as of October 14, 1983, that have not been previously collected or charged off. Reductions of these assets through proceeds of loans made by the Bank to the same borrower(s) or his/her nominee(s) are not considered collection for the purpose of this ORDER.
       (ii) Within 10 days from the effective date of this ORDER, the Bank shall amend its Reports of Condition and Income filed prior to the effective date of this ORDER and subsequent to October 14, 1983. Such amended Reports of Condition and Income shall reflect the charge-off of all assets or portions of assets classified "Loss" and 50 percent of all assets classified "Doubtful" as of October 14, 1983. Such reports shall reflect a provision for loan losses which is adequate in light of the condition of the Bank's loan portfolio.

   (b) During the period this ORDER is in effect, the Bank shall not extend, directly or indirectly, 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", "Doubtful," or "Substandard," and is uncollected, unless the Bank's board of directors (i) determines that such advance is in the best interest of the Bank; (ii) determines that the Bank has satisfied the requirement set out in paragraph 2(c); and (iii) approves such advance. The requirements of this paragraph 2(b) do not prohibit the Bank from renewing (after collection in cash of interest due from borrower) any credit already extended to the borrower.
   (c) Not later than 90 days from the effective date of this ORDER, the Bank shall:
    (i) analyze and evaluate each borrower who owes the Bank in the aggregate more than $75,000 and whose credit was adversely classified, in whole or in part, as of October 14, 1983, for the purpose of formulating a reasonable plan designed to maximize the Bank's repayment prospects, and
       (ii) reduce each such plan to writing, and
       (iii) where appropriate, enter into binding agreements with the borrower to implement such plan.

   In formulating such plans, the Bank may take into consideration the borrower's present financial distress, if any, and shall consider such modifications as accelerating amortization, forcing liquidation, obtaining additional collateral or other substantive financial support, or alternatively, in appropriate circumstances, the Bank may offer such concessionary treatment as lowering interest rates and/or principal payments or lengthening the contract periods for repayment.
    (d)(i) Not later than 180 days from the effective date of this ORDER, the Bank shall cause the total of the remaining assets classified "Doubtful" and the as- {{4-1-90 p.A-450}}sets classified "Substandard" as of October 14, 1983, to be reduced to not more than $1,910,000.
       (ii) Not later than 360 days from the effective date of this ORDER, the Bank shall cause the total of remaining assets classified "Substandard" and "Doubtful" as of October 14, 1983, to be reduced to not more than $1,000,000.
       (iii) Not later than 180 days from the effective date of this ORDER, the Bank shall take all steps necessary, consistent with sound banking practices, to reduce all loans listed for "Special Mention".

   (e) These requirements are not to be construed as standards for future operations, and, in addition to the foregoing, the Bank shall eventually reduce all classified assets. As used in paragraph 2(d) of this ORDER, the word "reduce" means (1) to collect or (2) to improve the quality of assets adversely classified or listed for "Special Mention" so as to warrant removing any adverse classification or "Special Mention" comment.
    3. (a)(i) During the period this ORDER is in effect, the Bank shall take all steps necessary to ensure that its equity capital and loan valuation reserve shall be equal to or exceed 8.0 percent of the Bank's average total assets plus loan valuation reserve for the applicable month under calculation.
       (ii) For the purposes of paragraph 3(a)(i) of this ORDER, the term "applicable month under calculation" shall be each June and December, beginning with the first such month occurring in 1985 after the effective date of this ORDER and the ratio shall be calculated as of the last day or each such month; the terms "equity capital," "total assets" and "loan valuation reserve" shall have the same meaning as those terms have in prevailing Instructions for Preparation of Reports of Condition; and the term "average total assets" shall be the average of the sum of the Bank's daily total assets for the month under calculation.

   (b) During the period this ORDER is in effect, if such ratio if less than 8.0 percent as of the date of calculation, the Bank shall, within 30 days, present to the Regional Director and the Commissioner a plan which shall call for bringing the ratio up to or in excess of 8.0 percent within a period of 60 days after the plan is implemented. The Bank shall implement the plan upon its review by the Regional Director and the Commissioner.
   (c) The formal capital ratio analysis as provided for in paragraph 3(a) of this ORDER, shall not negate the responsibility of the Bank and its board of directors for maintaining an adequate level of capital protection for the kind, quality, and degree of market depreciation of assets held by the Bank.
   4. (a) Not later than 30 days from the effective date of this ORDER, the Bank shall establish and thereafter continue to maintain an adequate reserve for loan losses, and such reserve shall be established and maintained by charges to current operating income. In complying with provisions of this paragraph, the board of directors of the Bank shall review the adequacy of the Bank's reserve for loan losses prior to the end of each calendar quarter. The minutes of the board meeting at which review is undertaken shall indicate the results of the review, the amount of any increase in the reserve recommended, and the basis for determination of the amount of reserve provided.
   (b) Reports of Condition and Income requested by the FDIC or the Commissioner and filed by the Bank subsequent to the effective date of this ORDER shall reflect a provision for loan losses which is adequate in light of the condition of the Bank's loan portfolio and shall reflect, at a minimum, the adjustment required by paragraph 4(a) of this ORDER. If necessary to comply with this paragraph 4(b) of this ORDER, the Bank shall file amended Reports of Condition and Income.
   5. Not later than 60 days from the effective date of this ORDER, the Bank shall take all steps necessary, consistent with sound banking practices, to eliminate and/or correct all violations of law, rules or regulations as of October 14, 1983. In addition, the Bank shall take all steps necessary, consistent with sound banking practices, to ensure future compliance with all applicable laws, rules and regulations.
   6. Not later than 60 days from the effective date of this ORDER, the board of directors of the Bank shall review and amend the loan policy which has been previously adopted by the board of directors of the Bank. The policy shall, among other things, address nonaccrual loans and charge-off of loans. Thereafter, the board of {{4-1-90 p.A-451}}directors of the Bank shall submit the amended policy to the Regional Director and the Commissioner for review and comment, and subsequent to the consideration of such comment, shall reaffirm and implement such amended loan policy and ensure that it is consistently followed by the officers of the Bank.
   7. Not later than 30 days from the effective date of the ORDER, the Bank shall develop a written funds management policy and submit it to the Regional Director and the Commissioner for review and comment. The written funds management policy shall include adequate liquidity provisions and shall incorporate specific plans for decreasing dependency on rate-sensitive and potentially volatile liabilities. Within 30 days of the submission of the written funds management policy to the Regional Director and the Commissioner, the board of directors of the Bank shall consider such comments which may be received, shall adopt the policy, and shall ensure that the policy is fully implemented by the officers of the Bank.
   During the period this ORDER is in effect, the Bank shall give written notice to the Regional Director at such time as five percent of the Bank's total deposits are 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 ("brokered deposits"). The notification shall 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 Regional Director reserves the right to object to the Bank's plans for utilizing brokered deposits. So long as the level of brokered deposits equals or exceeds five percent of the Bank's total deposits, the Bank shall provide on the first Monday of each month a written report to the Regional Director detailing the level, source and use of brokered deposits.
   8. The Bank shall, upon request of either the Regional Director or the Commissioner, furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   9. This ORDER shall become effective thirty (30) days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank.
   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.
   By direction of the Board of Directors, this 28th day of May, 1985.

/s/ Hoyle L. Robinson
Executive Secretary

CERTIFYING AND FILING OF
RECORD

FDIC-84-71(b)

   Pursuant to §308.13 of the FDIC Rules and Regulations, I hereby certify to the Board of Directors for decision the record of the hearing in the captioned proceeding. It contains a recommended decision, findings of fact, conclusions of law, proposed order, the transcript, exhibits, briefs and reply brief of the FDIC.
   The parties have been mailed a copy of the recommended decision on this date.
   Dated at Washington, D.C. this 1st day of February, 1985.

/s/ WILLIAM A. SHUE
Administrative Law Judge

RECOMMENDED DECISION

FDIC-84-71b

Decided: February 1, 1985
   * * *, Esquire, Assistant General Counsel, * * *, Esquire, * * *, Esquire and * * *, Esquire for Federal Deposit Insurance Corporation.
   * * *, Esquire and * * *, Esquire for respondent.
By William A. Shue, Administrative Law Judge.
   This proceeding was instituted pursuant to Section 8(a) of the Federal Deposit Insur- {{4-1-90 p.A-452}}ance Act (12 U.S. Code Section 1818(a)). A written Notice of Charges and Hearing was issued by direction of the Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") to the * * * Bank of * * *, * * * ("Bank") on April 15, 1984. The Notice of Charges and Hearing sought an order under the provisions of 8(b)(1) of the Federal Deposit Insurance Act. 12 U.S.C. Section 1818(b)(1). The Notice of Charges and Hearing was issued under the provisions of the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1811-1831(d) (the "Act") and the FDIC's Rules of Practice and Procedure, 12 C.F.R., Part 308. The FDIC commenced an examination of the Bank on October 14, 1983, and five months after the completion of the examination on April 15, 1984, instituted this action to impose a Cease and Desist Order on the Bank. The order was drawn to require the Bank to cease and desist from committing unsafe and unsound practices allegedly discovered during the course of the October 14, 1983 examination. The Bank has placed the allegations of the FDIC in issue and has raised numerous affirmative defenses.
   On September 12 through 18, 1984, a formal hearing was held before the undersigned in * * *. Briefs were filed by the parties and the FDIC also filed a reply brief.
   The findings and conclusions herein are based upon the record and upon observation of the demeanor of the various witnesses.

Statement of Facts

   The * * * Bank is a corporation existing and doing business under the laws of * * * and has its principal place of business at * * *. It is, and has been at all times pertinent to this proceeding, an insured statechartered bank and is not a member of the Federal Reserve System. As such, the Bank is subject to the Federal Deposit Insurance Act, 12 U.S.C. §§1811-1831d, the rules and regulations of the Federal Deposit Insurance Corporation and the laws of the State of * * *. The Federal Deposit Insurance Corporation has jurisdiction over the Bank and the subject matter of this proceeding.

    As of October 14, 1983:
       (a) The Bank's total equity capital and reserves equaled $3,340,000;
       (b) The Bank's adjusted equity capital and reserves equaled $2,449,000;
       (c) The Bank's adjusted total assets equaled $29,974,000;
       (d) The Bank's total deposits equaled $26,826,000; and
       (e) The Bank's total loans net of unearned income equaled $19,798,000.

   With respect to lending practices, it is an unsafe or unsound practice to extend credit without establishing or enforcing a realistic repayment program. The Bank in the instant case failed to establish and enforce realistic programs for the repayment of loans. Loans granted without a well-defined repayment program violate a fundamental principle of sound lending. Regardless of what appears to be adequate collateral protection, failure to establish at the outset or thereafter enforce a program of repayment almost invariably leads to troublesome and awkward servicing problems, and in many instances is responsible for serious loan problems including eventual losses. Establishment of repayment programs is especially important when a bank has a large volume of weak quality assets and where the bank has had a high degree of turnover in personnel, as is the case with this Bank.
   Extensions of credit involving this practice included the following:
   (a) * * *, balance $100,000, due on demand or July 1, 1984. This loan, while identified as a working capital advance, did not have the characteristics of such loans, and the Bank should have set up an amortization program or some other specified method for repayment.
   (b) * * *, balance $80,000, due on demand on June 15, 1984. The Bank also characterized this loan as a working capital advance; however, it did not have an amortization program and did not fluctuate with changes in the borrower's current assets. The Bank expected to be repaid through a public stock offering, which is a workout instead of a working capital repayment plan.
   (c) * * *, balance $509,878. This loan to a bank holding company was secured by stock of the subsidiary bank. Both were in a distressed condition and the stated method of repayment was refinancing with another unnamed bank, which, under the circumstances, was unrealistic. In an attempt to make the Bank's condition appear to be improved, the Bank sold participations in this credit. Concurrent agreements to repurchase nullified any apparent improvement.
{{4-1-90 p.A-453}}
   (d) * * *, balance $85,650. This was a working capital advance, but the Bank has not been paid from conversion of the inventory and accounts receivable to cash.
   (e) * * *, balance $85,876. This loan, for the purchase of a house for repair and resale, was secured by a second mortgage. No plan for reduction of the loan has been in place, and the loan remains on the Bank's books although it was made for a short-term purpose.
   (f) * * * balance $108,600. This was a term type note. The Bank had what its officers estimated to be $30,000 to $40,000 worth of collateral. The expected source of repayment was dependent upon the borrower's real estate company, there was no set repayment program in effect, and there was no indication of the repayment ability from the borrower's real estate company in the Bank's files.
   (g) * * *, balance $106,372. The Bank was receiving only $600 a month from funds generated by the collateral, although interest accruing on the debt totaled roughly $1400 a month. The interest was accruing on that loan faster than the borrower was able to pay and the unpaid interest was being added to the face of the note. The borrower did not have the capability of making payments other than the income generated by the collateral.
   (h) * * *, balance $170,346. The note called for monthly principal and interest payments of $5000. The loan was four payments delinquent on the day of examination, due to the fact that the Bank set up payment requirements in a manner that did not match his source of income.
   (i) * * *, balance $300,000. The Bank had not set up a stated repayment of program. It was anticipating repayment to come from the refinancing or the sale of the subsidiary bank, which was not a realistic repayment program in this instance.
   (j) * * *, balance $150,000 in loan. This note was dated August 15, 1983 and matured October 14, 1983. The Bank received a letter from the obligor dated May 8, 1983, indicating that it was his intention to reduce the indebtedness by $5000 per quarter, but as of the examination date no payments had been made.
   (k) * * *, balance $51,000. This loan was secured by real estate and was to be rewritten, to be paid from completion of some condominium units. It has not been on a payment basis, is past due and has no stated repayment plan.
   (l) * * *, balance $9,000. This loan was granted in 1981 to be a 20-day loan to carry stock. The Bank extended it one time for a month and it has been past due since 1981 with no plan for repayment.
   (m) * * *, balance $4,000. The Bank wrote the loan for a period of one year with no payments specified, and it has been past due since January of 1983.
   (n) * * *, balance $6,000. In 1978 the Bank made the loan for a six-month term. It was extended through September of 1980. It was never placed on a payment basis and has been past due since 1980.
   (o) * * *, balance $7,000. The note was dated July 19, 1979 and called for 11 payments of $150. The loan was delinquent; the entire loan was due July 19, 1982, but the last payment was made on June 10, 1982. The Bank has not enforced the repayment agreement.
   It is also an unsafe or unsound practice to extend credit on inadequate security. The Bank extended credit that is inadequately secured. One determines whether security for a loan is warranted by analyzing the borrower's financial condition, and by looking at the purpose of the loan, the terms of the loan, and the repayment of the loan. Extending credit that is inadequately secured evidences poor risk selection by the bank.
   Extensions of credit involving this practice included the following:
    (a) * * * Loan (2) was a $116,111 note on which the collateral was sold during the October 14, 1983, examination with the Bank receiving $11,500; the balance of approximately $105,000 was essentially unsecured and was classified. Loan (3), a $43,596 note, was unsecured, but the financial statements of the borrower did not support unsecured credit.
       (b) * * *, balance $250,000. The Bank had a first lien on one parcel of real estate, valued by Bank officials at $150,000, and a junior lien on real estate appraised at $1,545,000, subject to a prior lien of $1,100,000. The pledged collateral did not provide adequate protection because of the size of the prior lien, and {{4-1-90 p.A-454}}the financial condition of the borrowers warranted completely secured credit.
       (c) * * *, balance $86,224. The loan was secured by assignment of partnership interests whole liquidation value and marketability were questioned. The Bank's records had insufficient information to determine a value to assign to the collateral. The examiner viewed this loan as basically unsecured; the indebtedness was not adequately supported by the obligor's financial position. The obligor's indirect indebtness to the Bank for other loans was a further detraction.
       (d) * * *. This loan was secured by a lien on inventory. The book value of the inventory was less than the amount of the loan and the Bank should have required more security for this loan because of the financial position of the borrower, which had a deficit capital position and was losing money.
       (e) * * *. The collateral for this loan was stock of the subsidiary bank. This security was inadequate. The borrower was in a strained financial position.
       (f) * * *. The borrower was in a strained financial position, having a deficit capital position and showing losses. The Bank had insufficient capital to preclude this loan from being classified.
       (g) * * *. This loan was secured by a second mortgage on real estate. The value of the property at a reasonable sale price was less than the total of the first and second mortgages, leaving the Bank exposed. The security was inadequate.
       (h) * * *. The balance of this loan was $108,600, but the Bank's officers valued the collateral, including additional collateral which was obtained during the examination, at only $30,000 to $40,000.
       (i) * * *. Collateral was an assignment of partnership interests; however, the Bank did not know the value of the collateral and its marketability. The borrower has failed to show adequate repayment ability.
       (j) * * *. The loan was collateralized by a second lien on stock of the obligor and the subsidiary bank. According to the most current financial information held by the Bank, the total capital in the subsidiary bank was only $399,000 and it was subject to a $500,000 prior lien.
       (k) * * *, loan. Although the note stated that it was secured, the Bank held, as security, an assignment of a limited partnership interest which was valued at $288,000 by the borrower's partner. The Bank had no financial information to support the valuation.
       (l) * * *, balance $87,000. The Bank had inadequate security; after netting the current value of the certificates of deposit and the savings accounts held by the Bank, the unsecured portion of the loan totaled $38,897 and was classified "Substandard".
       (m) * * *, balance $161,900. The examiner classified $60,000 substandard after allowing for silver and coin collateral, because the remaining collateral, stock of limited marketability, did not provide the Bank with a sufficient protective margin.
       (n) * * *. The real estate collateral for this loan has a value-to-loan ratio of 92 percent, which was not sufficient, considering the strained position of this company. It was on the brink of bankruptcy and the loan has been turned over to the Bank's attorney for collection.
       (o) * * *. This loan was secured by closely-held stock which has been sold, with the proceeds applied to the loan. The loan was thereafter unsecured, but, considering the delinquent status of the loan, still required collateral.
       (p) The * * *. This company was in poor financial condition, showing deficit capital and losses for fiscal year 1983. The Bank was inadequately protected as the collateral values of the security did not cover these financial problems.
       (q) * * *. This loan was secured by office equipment which has been sold and applied to the loan, leaving a deficiency balance.
       (v) * * *, balance $15,000. This loan was secured by a second mortgage on a duplex in * * *, when made. At the time of delinquency the Bank's files indicated that the Bank did not consider that the property had any equity in it and it would not be worth the Bank's while to buy out the prior lien.
       (s) * * *, balance $40,000. This was an unsecured loan which the borrower did not pay when demand was made. The Bank rewrote the loan on an unsecured basis even though Bank officers {{4-1-90 p.A-455}}indicated during a previous examination that the Bank would attempt to obtain a second mortgage on the borrower's residence. There still has been no principal reduction. The borrower's financial statement did not support unsecured credit.
       (t) * * *, balance $42,000. The Bank had a $23,970 note and second mortgage on the borrower's residence, along with a second lien on inventory and accounts receivable. There was little equity in the residence, and the inventory collateral has little liquidation value and was not considered marketable.
       (u) * * *, balance $73,000. The Bank made three loans to this borrower. One, for $44,000, was secured by a second mortgage on real estate, while the other two were unsecured. There was no equity in the real estate and the financial statement of the borrower did did not support unsecured credit in this amount.
       (v) * * *, balance $22,000. This loan was secured by accounts receivable, which were of little value.
       (w) * * *, balance $38,000. This loan was secured by various equipment and vehicles of the borrower's asphalt construction business. Bank management was uncertain whether this collateral would pay off the loan if liquidated, and was considering taking a second lien on the borrower's residence in an effort to collect this debt.
       (x) * * *, balance $37,000. Bank management was liquidating this collateral and anticipated a loss of $36,000. The examiner reported "Loss" in the amount of $37,000.
       (y) * * *, balance $48,000. This loan was unsecured but the outdated financial statement did not support unsecured credit by the Bank in this amount.
       (z) * * *, balance about $16,000. The Bank had a lien on a 1980 El Dorado automobile that had been released, and the balance, which was classified Loss, was basically a deficiency balance.

   Furthermore, it is an unsafe or unsound practice to extend credit without complete and current credit information. The Bank in the case at bar extended credit to borrowers without complete and current credit information. The kind of information that a bank should obtain for its credit files depends on the type of loan involved. Applicable documentation includes a property statement or financial statement, operating statement, borrowing resolution, guaranties, financing statements, mortgages, deeds of trust, title policies or opinions, insurance appraisals etc. and so on correspondingly. Other essential information, such as the purpose of the borrowing and intended plan or sources of repayment, progress reports, inspections, memoranda of outside information and loan conferences, correspondence, and the like, should be contained in the bank's credit files. A bank cannot properly determine a borrower's credit worthiness without such information.
   Extensions of credit without complete and current information included the following:
    (a) * * *, balance $241,950. The Bank did not hold operating information on the restaurant, although that was the source of the payments.
       (b) * * *. In loan (3), the Bank did not have sufficient credit information on hand for it to appraise realistically the values of the partnership interests set out in a borrower's property statement.
       (c) * * *, balance $307,284. The Bank has an old property statement on the borrower and an outdated financial statement.
       (d) * * * and * * *. The Bank held no operating information for * * *, which owned the pledged collateral whose operating income was to some degree expected to be used to service the debt. The Bank held property statements on Mr. * * * and Mr. * * * but it lacked other information to support the values they had assigned to certain assets on their statements.
       (e) * * *. The Bank held no documentation concerning the receivables which represented a part of his assets, and it held no documentation concerning the $558,000 value assigned to the partnership interests which constituted collateral.
       (f) * * * The Bank held no financial information on * * *, the borrower's real estate operation, from whose income repayment was reportedly to come.
    {{4-1-90 p.A-456}}(g) * * *. The Bank held financial information that was too old in this instance.
       (h) * * *. The Bank has a financial statement on * * * or * * *, but the Bank did not hold information supporting assigned values.
       (j) * * *. The Bank held a property statement that was over one year old, which was too old for credit analysis purposes.
       (k) * * * The latest financial information held by the Bank on the borrower was dated in January of 1982.
       (l) * * *. The latest financial statement held by the bank was dated October 31, 1980, and was too be of value (sic, probably should read "too old to be of value." Ed.).
       (m) * * *. The Bank did not have any financial information on file about the borrower.
       (n) * * *. The Bank made these loans based upon outdated financial statements.
       (o) * * *. The Bank did not have any financial information on file for this company.
       (p) * * * The financial statement in the Bank's files was outdated by the time this loan was made.
       (q) * * *. The most recent financial statement in the Bank's file was dated November 15, 1979.

   As a consequence of the Bank's unreliable and negligent collection practices, it had an excessive and disproportionately large volume of poor quality loans in comparison to the Bank's total loans. Loans adversely classified as of October 14, 1983, were $3,072,000 "Substandard", $110,000 "Doubtful", and $395,000 "Loss". The adversely classified loans represented 18.07 percent of the Bank's total loans. (Id). The repurchase agreements stated in the paragraph below, which were not reflected on the Bank's financial statements, substantially increased the amount of low quality assets beyond that set out in Exhibit 3.
   The Bank engaged in a number of transactions whose effect was to obscure violations of law (to be further discussed in paragraph, infra), and deficiencies in its loan portfolio. Specifically, the Bank entered into the following repurchase agreements in order to facilitate the sale of participations in the * * * credit, but did not reflect these transactions on its books.
    (a) A $250,000 participation in the * * *, credit was sold on May 9, 1983, to * * *. A repurchase agreement contained in the participation certificate was not disclosed on the Bank's financial statements signed by * * *, on the Officer's Questionnaire, which contains three questions (No. 4, 14, and 15) that should have resulted in disclosure (Ex. 3, at 44, 45, and 47) or on the Bank's internal financial statement (Ex. 3, at 56). Had this been shown on the Bank's books, the "Substandard" classifications would have been $250,000 higher.
       (b) In April 1984, the Bank sold at $150,000 participation in the * * * credit, also subject to an obligation to repurchase. The Bank's liability with respect to this participation was also not reflected in the Bank's financial statement. At the hearing, the Bank represented the sale as an improvement in the Bank's loan portfolio. It was only on cross-examination that the repurchase agreement was disclosed.

   The effect of the repurchase agreements was to cancel the benefits which the Bank otherwise would have realized from the outright sale of participations in this credit.
   The Bank is notably reluctant to recognize loan losses by charging off loans. Consequently, the Bank's recoveries as a percentage of its prior period charge-offs are unusually low. In 1982, the Bank's peers recovered about 32 percent of the dollar amount of loans they charged off in the prior period, while the Bank recovered slightly more than 1.2 percent (Id.). Any augmentation of the Bank's loan valuation reserve must therefore come almost entirely from its provision for loan losses, which is an expense item.
   A higher loan loss provision should have been made for the following reasons: (a) because of the condition of the Bank's loan portfolio, (b) because the Bank was less likely than its peers to augment its loan valuation reserve through recoveries, and (c) because a poor quality loan had been sold subject to repurchase agreements. The Bank failed, to make provision for an adequate reserve (or allowance) for possible loan losses ("loan valuation reserve"). Consequently, the financial statements prepared by the Bank overstated its earnings.
{{4-1-90 p.A-457}}
   As of October 14, 1983, the loan valuation reserve of the Bank totaled $94,000, while the total of all loans subject to adverse classification was $3,577,000, including $3,072,000 "Substandard", $110,000 "Doubtful", and $395,000 "Loss".
   It should be noted that the Bank operated with inadequate liquidity as evidenced by the following:
       (a) As of October 14, 1983, the Bank's total net cash, short-term, and marketable securities of $2,730,000 ("liquid assets") equaled only 12 percent of its total net deposits and short-term liabilities of $22,755,000. This was down from 18 percent in March 1983 and thus reflected an adverse trend.
       (b) As of October 14, 1983, 13.5 percent of the Bank's long-term earning assets were funded by short-term, potentially volatile liabilities. This was up from 11.6 percent in March 1983 and also reflected an adverse trend.
   As of October 14, 1983, the Bank's total potentially volatile liabilities of $7,672,000 equaled 28 percent of total deposits and short-term liabilities of $27,177,000.
   As for violations, on or about May 10, 1983, the Bank extended credit to * * * in the amount of $1,694,034, by purchasing a $1,600,000 note plus accrued interest of $54,156 and collection costs of $39,878. The Bank then participated out $650,000 of the loan to two banks and $580,000 to Chairman * * * and received payment for the accrued interest. On September 22, 1983, the Bank repurchased $400,000 of Chairman * * * participations and resold $300,000 of that amount to another bank, retaining $100,000 for itself. As a result of these transactions, on September 22, 1983, the Bank had on its books a loan of $510,000 at a time when the Bank's legal lending limit was only $479,700 (* * * Statutes Annotated § 9-1104(a)) (Ex. 5; Ex. 3, at 16). In reality, the Bank materially understated on its books the amount of its illegal loan to * * * at that time because it failed to include the amount of the participation it had sold which was subject to a repurchase agreement.
   It should be noted that the Bank has had a large turnover in its executive ranks, particularly in its chief executive officers. Mr. * * * the Bank's principal shareholder, was involved in the selection of all chief executive officer's since acquiring control of the Bank. In hiring the Bank's current chief executive officer, Mr. * * * , Mr. * * * failed to determine that the former had been discharged from his previous banking position. None of the other directors had even inquired whether Mr. * * * had been dismissed from his previous banking job.
   Finally, it should be noted that the directors of the Bank were apparently unaware of the Bank's obligation to repurchase participations in loans the Bank had sold. The directors never inquired of management why the Bank's ratios were abnormal. No director ever asked Mr. * * * why the Bank's loans and leases past due ninety days were in the 75th percentile of the Bank's peer group. No director ever asked Chief Executive Officer * * * why the Bank's nonaccrual loans were in the 88th percentile of the Bank's peer group. No director ever inquired about the Bank's non-performing loans. Nor did any director inquire about the Bank's policy of taking into earnings interest that had not been collected in cash.

Discussion And Conclusions Of Law

   [.1] We shall now turn to the all important question whether the Bank has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Federal Deposit Insurance Act. To begin with, whether a particular practice is unsafe or unsound may be established as a matter of fact through the testimony of a bank examiner. First National Bank of Eden v. Department of the Treasury, 568 F.2d 610 (8th Cir. 1978). In that case the court approved the definition of "unsafe or unsound" by the Comptroller of the Currency, stating:

       Congress did not define unsafe and unsound banking practices in § 1818(b). However, the Comptroller [of the Currency] suggests that these terms encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder.1


1 The practices must be analyzed in light of all relevant factors: (CONTINUED)

{{4-1-90 p.A-458}} Id. at 611 n.2. Accord, First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 685 (5th Cir. 1983). Each of the practices alleged in this case to be unsafe or unsound falls squarely within those practices identified in the legislative history or administrative or judicial construction of section 8(b) of the Act.

   [.2—.6] In re First State Bank of Wayne Country, Monticello, Kentucky, FDIC-83-0132b, June 18, 1984, appeal docketed, No. 84-3562 (6th Cir. July 18, 1984) (Appendix attached hereto at 6) held that failing to establish and enforce realistic programs for the repayment of loans, extending credit that is inadequately secured, extending credit without complete and current credit information, failing to make provision for an adequate loan loss reserve, and operating with inadequate liquidity were unsafe or unsound practices.2

   As noted above, the legislative history of section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(b)) indicates that the "failure to make adequate transfers to reserves for absorbing losses" is an unsafe or unsound practice. Financial Institutions Supervisory and Insurance Act of 1966: Hearings on § 3158 Before the House Comm. on Banking and Currency, 89th Cong., 2d Sess., 49-50 (1966). Although the federal banking agencies normally treat this practice as an unsafe or unsound banking practice rather than a violation of reporting requirements (e.g. section 7(a)(1) of the Federal Deposit Insurance Act (12 U.S.C. § 1817(a)(1)) the considerations are the same as those governing the securities laws:

    The loan portfolio is typically one of the most important categories of assets of a financial institution, both in terms of value and risk of loss. Because of the singular importance to financial institutions of the allowance for possible loan losses, the understatement of the allowance will cause quarterly financial results to be inaccurate, frequently to a material degree. In order to insure that their quarterly financial statements accurately state results of operations and financial condition, publicly - held financial institutions have a duty to monitor the sufficiency of the allowance for possible loan losses on at least a quarterly basis. This duty can only be satisfied if management bases the amount of the allowance upon a consideration of all relevant factors, including but not limited to the historical experience of the institution, the collectibility of individual loans comprising the portfolio including their current status and performance and the impact of the current economic environment on the portfolio.
In re Utica Bankshares Corp, Exchange Act Release No. 20,702, Fed. Sec. L. Rep (CCH) § 73,424, at 63,098 (Feb. 29, 1984). One obvious factor to consider is the opinion of federal bank examiners.
Midland Bank and Trust Company v. Fidelity and Deposit Company of Maryland, 442 F. Supp 960 (D. N.J. 1977) demonstrates that the lack of a repayment program can conceal deficiencies in credit quality.
       When loans would become past due, * * * and/or * * * would bring them up to date with renewal loans. Certain loans were repeatedly renewed without any payments being forthcoming. The fact that the Bank was not making any money on these loans and that all these notes were delinquent was concealed by * * *, who in his monthly operating reports to the board listed renewal notes as new loans.
Id. at 964.
   It is to be noted that although classification is a judgmental exercise, there is ample authority that it is a meaningful one. As an example, of $719,000 in "adversely classified" loans and $2,205,000 in "especially noted" loans in the Midland Bank and Trust Company case in which the FDIC did not seriously doubt ultimate collectibility (442 F. Supp at 967), that bank ultimately lost more than $2,600,000.

   [.7—.8] The classification of loans has been accepted by Congress in imposing restrictions upon self-dealings by bank insiders. For instance, the "more than normal risk of repayment" language of section


1 CONTINUED: [W]hat 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.
Financial Institutions Supervisory and Insurance Act of 1966: Hearings on § 3158 Before the House Comm. on Banking and Currency, 89th Cong. 2d Sess., 49–50 (1966).

2 "Investments in loans on the basis of overappraisals of the security property. ...disregard of a borrower's incapacity and inability to repay his loan; and lack of any systematic collection program. ...failing to provide for adequate liquidity; and failure to make adequate transfer to reserves for absorbing losses "were specifically mentioned in Chairman Horne's memorandum.
{{4-1-90 p.A-459}}
   106(b)(2) of the Bank Holding Company Act of 1970, as amended by Title VIII of Financial Institutions Regulatory and Interest Rate Control Act of 1978 (12 U.S.C. § 1972(2)), section 22(h)(3) of the Federal Reserve Act (12 U.S.C. § 375b(3)) and section 215.4(a) of Regulation O (12 C.F.R § 215.4(a)) incorporate the definition of "Substandard" used by the FDIC during the period in which these provisions were adopted. Likewise, when it amended section 23A of the Federal Reserve Act (12 U.S.C. § 371c), Congress included "Substandard" assets within the definition of "low quality asset" and prohibited the transfer of such assets between affiliates.
   It is to be noted also that notwithstanding warning flags in the form of the Bank's deviation in performance from that of its peers, the directors of the Bank neglected to familiarize themselves with the Bank's problems. On the other hand, they permitted the Bank's controlling shareholder and a succession of chief executive officers to operate the Bank outside the normal bounds of banking practices.

   [.9] The standard of care for directors of banks was handed down in Briggs v. Spaulding, 141 U.S. 132, 165-66 (1891):

       [W]e hold that directors must exercise care and prudence in the administration of the affairs of a bank, and that this includes something more than officiating as figure-heads. They are entitled under the law to commit the banking business, as defined to their duly authorized officers, but this does not absolve them from the duty of reasonable supervision, nor ought they to be permitted to be shielded from liability because of want of knowledge of wrong-doing, if that ignorance is the result of gross inattention. ...

   [.10] It is neglect for directors to leave the management of a corporation entirely up to others. Heit v. Bixly, 276 F. Supp. 217, 231 (E.D. Mo. 1967). Consequently, directors have been held liable for the breaches of trust of officers and directors to whom management is entrusted, and reliance upon their apparent trustworthiness does not provide an escape from such liability (Id.).

   [.11] Finally, the duty of care also includes a duty to investigate where investigation is necessary to protect the interests of shareholders. Depinto v. Provident Security Life Insurance Co., 374 F. 2d 37 (9th Cir.), cert. denied, 389 U.S. 822 (1967). A director is not excused from this duty because he lacks expertise. Cf., Francis v. United Jersey Bank, 392 A. 2d 1233 (N.J. Super. Ct. Law Div 1978), aff'd, 407A. 2d 1253 (N.J. Super. Ct. App. Div. 1979) (holding liable a "simple housewife" who failed to discharge her responsibilities). Cf., F.D.I.D. v. Lesselyoung, 476 F. Supp. 938 (E.D. Wis. 1979), Aff'd sub nom. F.D.I.D. v. Lauterbach, 626 F. 2d 1327 (7th Cir. 1980) (director's duty to investigate precludes their asserting fraud in transactions with their corporations). Cf., Lane v. Chowning, 610 F. 2d 1385, 1389 (8th Cir. 1979) (duty of directors to investigate and remove an officer who receives an illegal fee for processing a loan). Such investigation should have been made into the reasons for the Bank's deviation from normal banking standards.
   At this point it is appropriate to state that which is quite obvious: the respondent Bank in this proceeding has engaged in unsafe or unsound practices.
   One further matter remains for consideration, namely the position of the Bank that a cease and desist order would severely damage it in practically every area of importance. Such an argument is not a very persuasive one.

   [.12] The evidence in the case at bar clearly demonstrates that the Bank engaged in unsafe or unsound practices and therefore such an order is an appropriate one to prevent future abuses and to protect its shareholders.
   Contentions of the parties as to fact or law not specifically discussed have been given due consideration and are found to be either not materially significant or justified.
   Therefore, upon consideration of the evidence of record the Administrative Law Judge makes the following conclusions of law:
   1. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding.
   2. The Bank has engaged in the following unsafe or unsound banking practices within the meaning of section 8(b) of the Federal Deposit Insurance Act:

       (a) The Bank has failed to establish and enforce realistic programs for the repayment of loans.
    {{4-1-90 p.A-460}}
       (b) The Bank has extended credit that is inadequately secured.
       (c) The Bank has extended credit without obtaining current and complete credit information.
       (d) The Bank has operated with an excessive level of adversely classified assets.
       (e) The Bank has failed to provide an adequate reserve for loan losses.
       (f) The Bank has operated without adequate liquidity.
       (g) The Bank has operated without adequate supervision by its board of directors.
       (h) The Bank has operated with management whose policies and practices are detrimental to the Bank.
   3. The Bank has violated * * * Statutes Annotated Section 9-1104(a) (Supp. 1983).

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, * * * providing:
IT IS HEREBY ORDERED, that * * * Bank, * * *, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, CEASE AND DESIST, directly or indirectly, from the following unsafe or unsound banking practices and violations of State Laws or regulations:

       A. Extending credit without establishing and enforcing realistic programs for the repayment of loans.
       B. Extending credit that is inadequately secured.
       C. Extending credit without obtaining current and complete credit information.
       D. Operating with an excessive level of adversely classified assets.
       E. Operating without an adequate reserve for loan losses.
       F. Operating without adequate liquidity.
       G. Operating without adequate supervision by its board of directors.
       H. Violating * * * Statutes Annotated Section 9-1104(a) (Supp. 1983).
       I. Operating with management whose policies and practices are detrimental to the Bank.
   IT IS FURTHER ORDERED, that * * * Bank, * * * , its directors, officers employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, take affirmative action as follows:
   1. (a) Not later than 30 days from the effective date of this ORDER, the Bank shall provide, and thereafter continue to retain, management acceptable to the Regional Director of the FDIC's * * * Regional Office ("Regional Director") and the State Bank Commissioner for the State of * * * ("Commissioner"). Such management shall include a qualified chief executive officer who shall be given stated authority in writing by the board of directors of the Bank, including the responsibility for implementing and maintaining lending and investment policies in accordance with sound banking practices.
       (b) Not later than 30 days from the effective date of this ORDER, the Bank shall submit to the Regional Director and to the Commissioner a management plan acceptable to the Regional Director and Commissioner. The plan shall require the board of directors of the Bank to periodically review the lending and investment authority of the Bank's officers and employees. The plan shall also include the requirement that the board of directors of the Bank, or a committee thereof consisting of not less than two outside directors, provide supervision over lending, investment and operating policies of the Bank sufficient to reasonably ensure that the Bank complies with the provisions of this ORDER.
       (c) As used herein, the term "outside director" is defined as an individual not in the employ of the Bank who owns not more than 5 percent of the Bank's outstanding voting shares, who is not relying on the Bank as a source of credit, and who is not related by blood, marriage, or significant business relationship to any stockholder owning more than 5 percent of the Bank's outstanding voting stock.
   2. (a) (i) Not later than 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" and 50 percent of all assets classified "Doubtful" as of October 14, 1983, that have not been previously collected or charged off. Reductions of these assets {{4-1-90 p.A-461}}through proceeds of loans made by the Bank to the same borrower(s) or his nominee(s) are not considered collection for the purpose of this ORDER.
       (ii) Within 10 days from the effective date of this ORDER, the Bank shall amend its Reports of Condition and Income filed prior to the effective date of this ORDER and subsequent to October 14, 1983. Such amended Reports of Condition and Income shall reflect the charge-off of all assets or portions of assets classified "Loss" and 50 percent of all assets classified "Doubtful" as of October 14, 1983. Such reports shall reflect a provision for loan losses which is adequate in light of the condition of the Bank's loan portfolio.
       (iii) The Bank shall, during the period this ORDER is in effect, eliminate from its books by sale at face value without recourse, charge-off or collection, all assets classified "Loss" and 50 percent of all assets classified "Doubtful" by the FDIC or Commissioner, within ten (10) days of receipt of a Report of Examination or Report of Visitation from the FDIC or the Commissioner showing assets classified "Loss" and/or "Doubtful".
   (b) During the period this ORDER is in effect, the Bank shall not extend, directly or indirectly, 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" "Doubtful," or "Substandard," and is uncollected, unless the Bank's board of directors (i) determines that such advance is in the best interest of the Bank; (ii) determines that the Bank has satisfied the requirement set out in paragraph 2(c); and (iii) approves such advance. The requirements of this paragraph 2(b) do not prohibit the Bank from renewing (after collection in cash of interest due from borrower) any credit extended to the borrower.
   (c) Not later than 90 days from the effective date of this ORDER, the Bank shall:
       (i) analyze and evaluate each borrower who owes the Bank in the aggregate more than $75,000 and whose credit was adversely classified, in whole or in part, as of October 14, 1983, for the purpose of formulating a reasonable plan designed to maximize the Banks repayment prospects, and
       (ii) reduce each such plan to writing, and
       (iii) where appropriate, enter into binding agreements with the borrower to implement such plan.
   In formulating such plans, the Bank may take into consideration the borrower's present financial distress, if any, and shall consider such modifications as accelerating amortization, forcing liquidation, obtaining additional collateral or other substantive financial support, or, alternatively, in appropriate circumstances, the Bank may offer such concessionary treatment at lowering interest rates and/or principal payments or lengthening the contract periods for repayment.
   (d) (i) Not later than 180 days from the effective date of this ORDER, the Bank shall cause the total of the remaining assets classified "Doubtful" and the assets classified "Substandard" as of October 14, 1983, to be reduced to not more than $1,910,000.
       (ii) Not later than 360 days from the effective date of this ORDER, the Bank shall cause the total of remaining assets classified "Substandard" and "Doubtful" as of October 14, 1983, to be reduced to not more than $1,000,000.
       (iii) Not later than 180 days from the effective date of this ORDER, the Bank shall take all steps necessary, consistent with sound banking practices, to reduce all loans listed for "Special Mention".
   (e) These requirements are not to be construed as standards for future operations, and, in addition to the foregoing, the Bank shall eventually reduce all classified assets. As used in paragraph 2(d) of this ORDER, the word "reduce" means (1) to collect or (2) to improve the quality of assets adversely classified or listed for "Special Mention" so as to warrant removing any adverse classification or "Special Mention" comment.
   3. (a) (i) During the period this ORDER is in effect, the Bank shall take all steps necessary to ensure that its equity capital and loan valuation reserve shall be equal to or exceed 8.0 percent of the Bank's average total assets plus loan valuation reserve for the applicable month under calculation.
       (ii) For the purposes of paragraph 3(a)(i) of this ORDER, the term "applicable month under calculation" shall be each June and December, beginning with {{4-1-90 p.A-462}} the first such month occurring in 1985 after the effective date of this ORDER and the ratio shall be calculated as of the last day of each such month; the terms "equity capital," "total assets" and "loan valuation reserve" shall have the same meaning as those terms have in prevailing Instructions for Preparation of Reports of Condition; and the term "average total assets" shall be the average of the sum of the Bank's daily total assets for the month under calculation.
   (b) During the period this ORDER is in effect, if such ratio is less than 8.0 percent as of the date of calculation, the Bank shall, within 30 days, present to the Regional Director and the Commissioner a plan which shall call for bringing the ratio up to or in excess of 8.0 percent within a period of 60 days after the plan is implemented. The Bank shall implement the plan upon its review by the Regional Director and the Commissioner.
   (c) The formal capital ratio analysis as provided for in paragraph 3(a) of this ORDER, shall not negate the responsibility of the Bank and its board of directors for maintaining an adequate level of capital protection for the kind, quality, and degree of market depreciation of assets held by the Bank.
   4. (a) Not later than 30 days from the effective date of this ORDER, the Bank shall establish and thereafter continue to maintain an adequate reserve for loan losses, and such reserve shall be established and maintained by charges to current operating income. In complying with provisions of this paragraph, the board of directors of the Bank shall review the adequacy of the Bank's reserve for loan losses prior to the end of each calendar quarter. The minutes of the board meeting at which review is undertaken shall indicate the results of the review, the amount of any increase in the reserve recommended, and the basis for determination of the amount of reserve provided.
   (b) Reports of Condition and Income requested by the FDIC or the Commissioner and filed by the Bank subsequent to the effective date of this ORDER shall reflect a provision for loan losses which is adequate in light of the condition of the Bank's loan portfolio and shall reflect, at a minimum, the adjustment required by paragraph 4(a) of this ORDER. If necessary to comply with this paragraph 4(b) of this ORDER, the Bank shall file amended Reports of Condition and Income.
   5. Not later than 60 days from the effective date of this ORDER the Bank shall take all steps necessary, consistent with sound banking practices, to eliminate and/or correct all violations of law, rules or regulations as of October 14, 1983. In addition, the Bank shall take all steps necessary, consistent with sound banking practices, to ensure future compliance with all applicable laws, rules and regulations.
   6. Not later than 60 days from the effective date of this ORDER, the board of directors of the Bank shall review and amend the loan policy which has been previously adopted by the board of directors of the Bank. The policy shall, among other things, address nonaccrual loans and charge-off of loans. Thereafter, the board of directors of the Bank shall submit the amended policy to the Regional Director and the Commissioner for review and comment and, subsequent to the consideration of such comments, shall reaffirm and implement such amended loan policy and ensure that it is consistently followed by the officers of the Bank.
   7. Not later than 30 days from the effective date of this ORDER, the Bank shall develop a written funds management policy and submit it to the Regional Director and the Commissioner for review and comment. The written funds management policy shall include adequate liquidity provisions and shall incorporate specific plans for decreasing dependency on rate-sensitive and potentially volatile liabilities. Within 30 days of the submission of the written funds management policy to the Regional Director and the Commissioner, the board of directors of the Bank shall consider such comments which may be received, shall adopt the policy, and shall ensure that the policy is fully implemented by the officers of the Bank.
   During the period this ORDER is in effect, the Bank shall give written notice to the Regional Director at such time as five percent of the Bank's total deposits are 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 ("brokered deposits"). The notification {{4-1-90 p.A-463}}shall 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 Regional Director reserves the right to object to the Bank's plans for utilizing brokered deposits. So long as the level of brokered deposits equals or exceeds five percent of the Bank's total deposits, the Bank shall provide on the first Monday of each month a written report to the Regional Director detailing the level, source and use of brokered deposits.
   9. The Bank shall, upon request of either the Regional Director or the Commissioner, furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   10. This ORDER shall become effective thirty (30) days from the date of it issuance.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank.
   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.
   At Washington, DC, by /s/ William A. Shue, Administrative Law Judge.
/s/ HOYLE L. ROBINSON
Executive Secretary

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