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FDIC Enforcement Decisions and Orders

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   [5062] FDIC Docket No. FDIC-85-42b (3-24-86).

   Bank ordered to cease and desist from unsafe or unsound banking practices and from violations of law. FDIC stated that the bank's poor condition was not the result of economic factors in the agricultural economy since other banks similarly situated were in better financial conditions than this bank. FDIC also ordered the addition of two outside directors to the bank's board of directors.

   [.1] Practice and Procedure—Petitions to FDIC—Oral Argument

   Oral argument before the Board was unnecessary because the factual and legal arguments were fully set forth in the parties' pleadings, the Recommended Decision, and the Exceptions.

   [.2] Agricultural Banks—Management

   Although economic conditions in rural areas have increased the possibility of loan losses for agricultural banks, this fact by itself does not excuse unsafe or poor management. Local agricultural decline should have led bank management to make adjustments in banking practices to restore the bank to a sound financial condition.

   [.3] Unsafe or Unsound Banking Practice—Generally Defined

   Imprudent practices include: the repeated failure to identify adequate collateral margins on loans; the propensity to permit borrowers to capitalize unpaid interest; the repeated practice of extending credit to multiple borrowers where the source of repayment is a single course; permitting the loan portfolio to contain an excessive volume of adversely classified assets (25.9% of the bank's total loans); permitting the amount of debt to borrowers to increase as collateral value declined; paying dividends without regard to earnings or losses; operating a bank
{{4-1-90 p.A-789}}with a loan-to-deposit ratio of 75.8%, which does not provide for adequate liquidity; operating with an inadequate loan valuation reserve; and operating a bank with an adjusted primary capital ratio of 5.76%.

   [.4] Directors—Independent Directors Added to Board

   FDIC may order the addition of outside directors to a bank's board of directors to exercise independent business judgment and oversight over the affairs of the bank when a bank's current board of directors and management fail to adequately respond to deteriorating conditions.

   [.5] Directors—Duties and Responsibilities—Adequacy of Employees

   A bank's board of directors should exercise judgment independent of management. The board is obliged to select and maintain capable management and see that the bank operates in compliance with law and regulations.

   [.6] Cease and Desist Orders—FDIC Authority to Issue

   If a bank has engaged in unsafe and unsound practices and has committed numerous violations of law and regulations, the FDIC has broad discretion to exercise its expertise in fashioning an appropriate remedy to stop the practices and violations, to prevent abuses, and to correct the effects of the practices or violations.

   [.7] Deposits—Brokered—Reports to FDIC

   A bank in a weakened financial condition, whose loan to deposit ratio is too high, may turn to highly volatile brokered deposits to overcome liquidity difficulties. A reporting provision in an order would require the bank to give notice to the FDIC whenever it obtained brokered deposits and will merely alert the Regional Director to the fact that the bank is turning to brokered deposits as a funding source.

   [.8] Call Reports—Amendment Required

   Call reports that do not provide an accurate picture of a bank's condition because they do not provide for an adequate loan valuation reserve for possible loan losses may require refiling.

   [.9] Examination of Banks

   The purpose of a bank examination is to maintain confidence in the banking system, provide a report of the bank's condition to the bank's management and to the FDIC, protect the FDIC's insurance fund, and insure compliance with various laws and regulations.

   [.10] Definitions—Liquidity

   Liquidity refers to the ability of a bank to provide, in a cash effective manner, for decreases in its deposits and increases in its assets.

   [.11] Liquidity—Adequacy—Determination

   The adequacy of a bank's liquidity is based on several factors, including the following: the loan to deposit ratio, the history of borrowings, and the volume of adversely classified assets.

   [.12] Loan Loss Reserve—Purpose

   The purpose of a loan valuation reserve is to absorb potential loan losses in those loans classified Substandard and all other unrecognized losses in the loan portfolio.

   [.13] Unsafe or Unsound Practices—Statutory Standard

   An unsafe or unsound banking practice encompasses what is 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.
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   [.14] Cease and Desist Orders—Defenses—Cessation of Violation

   Improvements made by a bank, changes in practices, and correction of deficiencies are not defenses to a cease and desist order.

In the Matter of * * * BANK (Insured State Nonmember Bank)


DECISION
FDIC-85-42b

   This proceeding arises under Section 8(b) of the Federal Deposit Insurance Act (the "Act"), 12 U.S.C. § 1818(b). On February 13, 1985, the Board of Review of the Federal Deposit Insurance Corporation (the "FDIC") issued a written Notice of Charges and of Hearing to * * * Bank, * * * (the "Bank"), pursuant to Section 8(b) of the Act and the FDIC's Rules of Practice and Procedures, 12 C.F.R. Part 308. The Notice of Charges and of Hearing (the "Notice") charged the Bank with having engaged in unsafe and unsound practices and violations of laws, rules, and regulations. The Notice sought an Order under Section 8(b)(1) of the Act requiring the Bank to cease and desist from these unsafe or unsound practices and violations and requiring the Bank to remedy the conditions resulting from such practices and violations.
   A formal hearing was held before Administrative Law Judge Angelo G. Nicchitta (the "ALJ") June 24, 1985 through June 28, 1985. Both the Bank and FDIC Compliance and Enforcement Section ("FDIC-C&E") were afforded an opportunity to submit to the ALJ proposed Findings of Fact, Conclusions of Law, briefs and responses to papers filed by the other party. The ALJ issued his Recommended Decision ("RD") on November 6, 1985. The ALJ recommended entry of a Cease and Desist Order. FDIC-C&E filed exceptions on December 2, 1985. The Bank filed exceptions on December 3, 1985.
   In this decision, the Board of Directors ("Board") adopts the ALJ's recommendations with several modifications and denies the Bank's request for oral argument.
Oral Argument

   [.1] By letter dated December 3, 1985, pursuant to section 308.17 of the Rules and Regulations, 12 C.F.R. § 308.17, the Bank requested permission to present oral argument to the Board. The Board has considered the request, but finds oral argument to be unnecessary because the factual and legal arguments are fully set forth in the parties' pleadings, the Recommended Decision and the Exceptions. The Board finds oral argument would not aid its deliberations.
The Bank Has Been Operating in An Unsafe Or Unsound Manner
   The Bank does not dispute that it is in an unsound condition. It concedes that the overall condition of the Bank's loan portfolio is poor, and that adversely classified assets increased between the last two FDIC examinations. It does not dispute that at the time of the May 23, 1984 examination, capital and loan valuation reserves were inadequate. The Bank contends that the Bank's unsound condition is not a result of any unsound banking practices, but rather the result of declining conditions in the agricultural economy that the Bank serves. It further argues that the Bank's condition improved between the May 23, 1984 examination and the hearing. The Bank also disputes the need for imposition of particular provisions of the proposed order.

   [.2] The ALJ concluded that the Bank has been operated in an unsafe or unsound manner. (RD at 15.) The Bank argued that the general decline in farm prices and land values in * * * County are the primary causes of its liquidity problems and its abnormally high classification ratio. The ALJ rejected that argument observing:

       While there can be no question that economic conditions in rural areas have increased the possibility of loan losses for agricultural banks, this fact by itself does not excuse unsafe or poor management and it clearly does not completely explain the high percentage of classified loans at the * * * Bank. It is clear that sound management practice requires bank officers to adjust to changing economic conditions, not simply throw up their hands and then reply. "But what could we do? Times are bad."
(RD at 15)
   The ALJ concluded and the Board agrees that the local agricultural decline should have led Bank management to make adjustments in banking practices to restore the Bank to a sound financial condition. As the ALJ found, The * * * Bank's overall position is much worse than that of other agri- {{4-1-90 p.A-791}}cultural banks because it failed to make those adjustments. (RD at 15.)
   The Order to Cease and Desist ("Order") which the Board adopts with this decision is remedial in nature. Based on the evidence of record, it constitutes the Board's best judgment of the steps to be taken in order to restore the Bank to a financially sound condition within the local economy in which the Bank operates. It proscribes certain practices proven to be unsafe or unsound and establishes a phased schedule of remedial affirmative measures.
   With two exceptions, the Board finds the ALJ's recommended Findings of Fact are supported in all material respects by substantial evidence in the record. First, Finding Number 2 is in error in two respects. As of May 23, 1984, the Bank's total assets equaled $20,710,000 not $1,143,000. (FDIC Ex. 2 at 54). The $1,143,000 figure is actually the adjusted equity capital and reserves. Second, the Board does not agree that the Bank had an adequate repayment program. (Proposed Finding of Fact 26, RD at 4). The Board finds the Bank's repayment program is inadequate because performance standards were not enforced. A bank's repayment program cannot be characterized as adequate when, as the ALJ observed, "the continual capitalization of interest and the extension of additional credit to borrowers regularly unable to meet repayment schedules, constitute an unsafe or unsound banking practice." (RD at 16) Except as just noted, the Board adopts and incorporates by this reference the ALJ's proposed Findings of Fact.

   [.3] There is no need to repeat the ALJ's detailed review of the particular unsafe and unsound practices. Imprudent practices include: (1) the repeated failure to identify adequate collateral margins on loans; (2) the propensity to permit borrowers to capitalize unpaid interest, that is to extend additional credit for the amount of interest owed when loans are renewed; (3) the repeated practice of extending credit to multiple borrowers where the source of repayment is a single source; (4) permitting the loan portfolio to contain an excessive volume of adversely classified assets, $3,645,000 or 25.9 percent of the Bank's total loans as of May 23, 1984; (5) permitting the amount of debt to borrowers to increase as collateral value declined; (6) paying dividends without regard to earnings or losses; (7) operating the Bank with a loan to deposit ratio of 75.8 percent as of May 23, 1984, which does not provide for adequate liquidity; (8) operating with an inadequate loan valuation reserve; and (9) operating the Bank with an adjusted primary capital ratio of 5.76 percent as of May 23, 1984.
Scope of the Remedial Order
   The unsafe or unsound banking practices noted above and in the ALJ's Recommended Decision are of considerable concern to the Board because they have led to losses or pose unacceptable risk of future Bank losses, and, unless reversed, possible failure of the Bank. These conditions reflect a failure on the part of the Bank's directors and management to establish prudent policies and ensure compliance with them. The failure of management and directors to take required action, despite regulatory warnings, makes clear that a broad remedial order is required.
Directors And Management

   [.4] The failure of the Bank's board of directors and the current management adequately to respond to deteriorating conditions convince the Board that two additional outside directors should be added to the Bank's board of directors to exercise independent business judgment and oversight over the affairs of the Bank.
   The record is replete with evidence that the current board exercised little if any independent judgment from that of Mr. * * *, Chairman of the Board and President of the Bank and President and Director of * * * which owns the Bank. The Board's Order requires that at least two new outside directors be added to the Bank's board of directors and that that board remain composed of a majority who are independent directors. This should increase the likelihood that the board of directors will exercise independent judgment and make more careful evaluations of management decisions.

   [.5] The Bank's board of directors should exercise judgment independent of management. The board is legally responsible for the sound direction of the Bank. The board is obliged to select and maintain capable management and see that the Bank operates {{4-1-90 p.A-792}}in compliance with law and regulations. The board must formulate specific Bank goals and policies covering investments; loans; asset, liability and funds management; profit planning and budgeting; capital planning; internal routine and controls; and personnel policies. The board is also obliged to avoid self-serving practices and authorize payment of dividends only as may properly be paid.1
   We find unpersuasive the Bank's argument that if it undertakes a search for new directors, information about the Bank's weak financial condition might leak into the community and further harm the Bank or that it will be unable to find qualified board members. Such assertions are premature and speculative, at best. Should the Bank undertake such an effort without success it can document that effort and, if good cause can be shown, petition the Regional Director for additional time to comply or request other relief.
   In its exceptions to the ALJ's decision, FDIC-C&E urges that a management clause is necessary in order to make certain a new chief executive officer is appointed who will restore the Bank to a sound condition. The ALJ declined to recommend such a clause on the theory that such a clause "is [not] within the purview of a Cease and Desist Order." (RD at 18). He opined that requiring bank management to be approved by the FDIC Regional Director would give the FDIC the power to remove Mr. * * * without complying with Section 8(e) of the FDI Act. (Id).

   [.6] The Board rejects the ALJ's conclusion that a requirement that the Bank obtain management acceptable to the Regional Director cannot be included in a cease and desist order. Where the Board finds that a bank had engaged in unsafe or unsound practices and has committed numerous violations of law and regulations, it has, under established court precedent, broad discretion to exercise its expertise in fashioning an appropriate remedy to stop the practices and violations, to prevent abuses and to correct the effects of the practices or violations. First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 680 (5th Cir. 1983); del Junco v. Conover, 682 F.2d 1338, 1340 (9th Cir. 1982), cert. denied, 459 U.S. 1146 (1983); Gross National Bank v. Comptroller of the Currency, 573 F.2d 889, 897 (5th Cir. 1978).
   A clause requiring management acceptable to the Regional Director in a cease and desist order is far more limited than that imposed under a final Section 8(e) removal order. In a Section 8(e) removal, the officer or director is prohibited from participating in any manner in the conduct of the affairs of the bank with which he or she is then associated, and from participating in any manner in the conduct of the affairs of any other FDIC insured bank without the prior approval of the appropriate Federal banking agency. 12 U.S.C. § 1818(e)(1), (j)(2). As such, a Section 8(e) removal would not only circumscribe an officer's authority, but would also remove him or her as an officer and member of the board, and prevent him or her from exercising his or her interest in the Bank and, without regulatory approval, any other FDIC insured bank. Therefore, it is clear that the ALJ was incorrect in equating the relief proposed by FDIC-C&E with that afforded under Section 8(e) of the FDI Act.
   The record demonstrates that Mr. * * * has exhibited a reluctance to make difficult decisions, particularly with regard to longtime bank customers with problem loans. However, the Board is of the opinion that an independent bank board of directors that complies with the remedial provisions of this order is likely to restore the Bank to a sound financial condition. The Bank's board will have the authority to make management changes as needed. Therefore, the management clause proposed by FDIC-C&E is not being adopted at this time. The Board wishes to emphasize that it is the responsibility of the board of directors of the Bank to take whatever action that is necessary to insure that the Bank is operated in the future in a safe and sound manner. The addition of independent directors does not foreclose the question of new management, or indeed any changes beyond those called for by the Order. If the Bank's board of directors determines that new management should be installed, or that remedial steps beyond those called for in the attached Order should be taken, we expect that it will take such action promptly. In light of the history of the Bank and this Board's findings, the Bank's board of


1 For a more complete discussion of directors' duties and legal obligations, see FDIC Division of Bank Supervision, Manual of Examination Policies, Section L.
{{4-1-90 p.A-793}}directors should be especially attentive to their responsibilities.
Brokered Deposits
   The ALJ declined to recommend a reporting provision that would require the Bank to give notice to the FDIC whenever it obtained brokered deposits. The ALJ declined to recommend this requirement on the ground that the Bank had not used brokered deposits nor was likely to do so in the future.

   [.7] The Board has found this Bank to be in a weakened financial condition resulting from unsafe and unsound practices as well as a deteriorating local agricultural economy. The Bank's loan to deposit ratio has been found to be too high. Should the Bank's condition continue to deteriorate, there is the potential danger that it would turn to highly volatile brokered deposits to overcome liquidity difficulties.2 Thus, past history and present intentions are not particularly useful guides.
   The reporting requirement will merely alert the Regional Director to the fact that the Bank is turning to brokered deposits as a funding source. The FDIC-C&E proposed a requirement that the Regional Director be notified whenever the Bank accepts brokered deposits. The Board has modified that proposal to require notice only whenever five percent or more of the Bank's total deposits are funded by brokered deposits. If the Bank continues its present course and does not utilize brokered deposits, the reporting requirement does not create any burden on the Bank.
Capital
   As of the examination of May 23, 1984, the Bank's ratio of adjusted equity capital and reserves (or "primary capital") to total assets was 5.76 percent. FDIC-C&E argued for, and the ALJ adopted, a requirement that adjusted equity capital and reserves (or primary capital) be raised to 8 percent of total assets. The Bank contended that 7 or 7.5 percent would be adequate. In recommending 8 percent, the ALJ observed:
   In light of the fact that respondent Bank's financial position is even worse than that of other agricultural banks in the Midwest and that its total adversely classified assets as a percentage of its total equity and capital reserves was five times the normal amount than other banks examined by the FDIC, an 8 percent capital ratio would not seem to be unreasonable.
(RD at 19.)
   The Board agrees that the Bank's poor financial condition and the poor quality of its loan portfolio require that primary capital must be raised to at least 8 percent of total assets.
Submission Of Revised Call Reports

   [.8] The ALJ declined to include a requirement that the Bank's Reports of Condition and Income (commonly referred to as "call reports") be republished to reflect proper provision for loan losses. Call reports filed after May 23, 1984, do not provide an accurate picture of the Bank's condition because they did not provide for an adequate loan valuation reserve for possible loan losses. So that the call reports accurately describe the condition of the Bank as of the dates the reports were filed, the Board orders that the call reports be refiled.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 24th day of March, 1986.
   /s/ Hoyle L. Robinson
   Executive Secretary

ORDER TO CEASE AND DESIST
FDIC-85-42b

   IT IS HEREBY ORDERED, that * * * Bank, * * * ("Bank"), its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe or unsound banking practices:
   1. Operating with an inadequate level of equity capital protection;
   2. Engaging in hazardous lending and lax collection practices;
   3. Operating with an inadequate loan valuation reserve;
   4. Operating with inadequate liquidity;
   5. Paying excessive cash dividends in relation to the Bank's net income; and


2 Experience over the past several years has indicated that brokered deposits are utilized more frequently and more extensively by banks with financial problems than banks in sound condition.
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   6. Operating in violation of Section 22(h) of the Federal Reserve Act, as amended (12 U.S.C. 375b), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215) ("Regulation O") promulgated thereunder, and made applicable to insured State nonmember banks by Section 18(j)(2) of the Federal Deposit Insurance Act as amended (12 U.S.C. 1828(j)(2)), as more fully set forth on page 6-a of the Report of Examination prepared by the FDIC on May 23, 1984.
   IT IS FURTHER ORDERED, that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of its affairs, take affirmative actions as follows:
   1. (a) Within 120 days from the effective date of this ORDER TO CEASE AND DESIST ("ORDER"), the Bank's board of directors shall take all steps necessary to increase the Bank's primary capital by $500,000 or the amount necessary to bring its adjusted primary capital to asset ratio to 8 percent, whichever is less. Such increase in primary capital may be accomplished by:
   (i) The sale of equity securities; or
   (ii) The collection in cash of assets previously charged off; or
   (iii) The direct contribution of cash by the directors and/or shareholders of the Bank; or
   (iv) The reimbursement for income tax payments made to the holding company; or
   (v) Any other means acceptable to the Regional Director of the Federal Deposit Insurance Corporation's ("FDIC") * * * Regional Office ("Regional Director"); or
   (vi) Any combination of the above means.
   (b) If all or part of the increase in primary capital required by this paragraph is to be accomplished by the sale of new securities, the board of directors of the Bank shall forthwith take all steps necessary to adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of said plan. Should the implementation of the plan involve public distribution of the Bank's securities, including a distribution limited only to the Bank's existing shareholders, the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation of the plan and, in any event, not less than 20 days prior to the dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC in Washington, D.C., for its review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination. If the increase in equity capital is provided by the sale of mandatory convertible subordinated debentures and/or preferred stock, then all terms and conditions of the issue shall be presented to the Regional Director for prior approval.
   (c) In complying with the provisions of paragraph 1(b) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of the Bank's stock. The written notice required by this paragraph shall be furnished within ten (10) calendar days from the date any material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.
   2. Within 90 days from the effective date of this ORDER, the Bank shall take all steps necessary to increase by at least two individuals the number of board of directors members who are independent with respect to the Bank. This requirement may be accomplished through appointment or election at a special or general shareholders' meeting, or in any other manner consistent with the Bank's bylaws and the laws of the State of * * *. Further, the Bank shall take all steps necessary to ensure that its board of directors remains composed of a majority of independent members. For purposes of this ORDER, a candidate who is independent with respect to the Bank shall be any individual (1) who is not an officer of the Bank or any affiliated bank, (2) who does not own more than five (5) percent of the Bank's outstanding shares, (3) who is not related by blood or marriage to an officer of the Bank or to any stockholder own- {{4-1-90 p.A-795}}ing more than five (5) percent of the Bank's outstanding shares, and (4) who is not indebted to the Bank, directly or indirectly (including the indebtedness of any entity in which the individual has a substantial financial interest), in an amount exceeding five (5) percent of the Bank's total equity capital and reserves.
   3. (a) As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend without the prior written consent of the Regional Director.
   (b) As of the effective date of this ORDER, the Bank shall not make any payments to, or for the benefit of, * * *, the Bank's parent holding company, without the prior written consent of the Regional Director.
   4. Within 30 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 May 23, 1984, that have not been previously collected or charged off. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   5. (a) Within 30 days from the effective date of this ORDER, the Bank shall replenish its loan valuation reserve by an expense entry in an amount equal to those loans required to be charged off by paragraph 4 of this ORDER.
   (b) Within 30 days from the effective date of this ORDER, the Bank shall make an additional provision for loan losses which, after careful review and consideration by the board of directors of the Bank, reflects the potential for future losses in the remaining "Substandard" and "Doubtful" loan classifications and in the portion of the portfolio that is not adversely classified. At a minimum, the loan valuation reserve shall be maintained at a level equal to two percent of total loans.
   (c) Within 30 days from the effective date of this ORDER, Reports of Condition and Income requested by the FDIC and filed by the Bank subsequent to May 23, 1984, shall be amended and refiled if they do not reflect a provision for loan losses and a loan valuation reserve which are adequate considering the condition of the Bank's loan portfolio and which, at a minimum, incorporate the adjustments required by paragraphs 5(a) and 5(b) of this ORDER.
   (d) Prior to submission or publication of all Reports of Condition and Income requested by the FDIC after the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's loan valuation reserve and accurately report the same. The minutes of the Board meeting at which such review is undertaken shall indicate the results of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.
   6. (a) Within 180 days from the effective date of this ORDER, the Bank shall reduce all remaining assets classified "Substandard" and "Doubtful" as of May 23, 1984, to not more than $2,000,000; within 360 days of the effective date of this ORDER, the Bank shall reduce the aforementioned assets classified "Substandard" and "Doubtful" to not more than $1,250,000; and within 540 days of the effective date of this ORDER, the Bank shall reduce the aforementioned assets classified "Substandard" and "Doubtful" to not more than $750,000. As used in this ORDER, the words "reduce" and "eliminate" mean (1) to collect, (2) to charge off, or (3) to substantially improve the quality of assets adversely classified to warrant removing any adverse classification. The requirements of this paragraph are not to be construed as standards for future operations; and, in addition to the foregoing, the Bank shall eventually reduce all other adversely classified assets.
   (b) As of the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has a loan or other extension of credit with the Bank which has been charged-off or classified, in whole or in part, "Loss" and is uncollected. The requirements of this subparagraph do not prohibit the Bank from renewing, upon collection of interest in cash from the borrower, any credit already extended to any borrower.
   7. Within 60 days of the effective date of this ORDER, and annually thereafter during the life of this ORDER, the board of directors of the Bank shall review the {{4-1-90 p.A-796}}Bank's investment/liquidity policy and funds management practices for adequacy and, based upon this review, shall make appropriate revisions in the policy that are necessary to strengthen funds management procedures and maintain adequate provisions to meet the Bank's liquidity needs. The minutes of the board meetings at which such reviews are undertaken shall indicate the results of the reviews.
   8. (a) Within 60 days from the effective date of this ORDER, the Bank shall review its lending policy for adequacy and implement written revisions thereto that are necessary to provide for safe and sound administration of all aspects of its lending function, including loan renewals and collections. The revised policy shall be submitted to the Regional Director for his review and comment.
   (b) As a minimum, revisions to the Bank's lending policy shall:
   (i) Require repayment schedules that are consistent with the purpose of the loan.
   (ii) Require that the source of repayment be specified.
   (iii) Provide guidelines for collateral margins.
   (iv) Require periodic evaluation of collateral values.
   (v) Require prior approval of the Bank's board of directors for capitalizing interest on renewal loans.
   (vi) Prohibit the capitalization of interest on loans of classified or financially troubled borrowers unless the additional funds advanced are adequately protected by collateral.
   (vii) Provide guidelines for placing loans on nonaccrual status that are consistent with instructions for preparation of FDIC Reports of Condition.
   (viii) Require that the direct and indirect obligations of the same or related interests shall not exceed 25 percent of total equity capital and reserves.
   9. The Bank shall reduce, in a manner consistent with sound banking practices, the level of its total loans to not more than 65 percent of its total deposits within 180 days from the effective date of this ORDER, and the Bank shall further reduce total loans to not more than 60 percent of total deposits within 360 days of the effective date of this ORDER.
   10. Within 30 days from the effective date of this ORDER, the Bank shall take all steps necessary to eliminate and/or correct all violations of laws and regulations noted on page 6-a of the Report of Examination of May 23, 1984. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.
   11. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER (1) in conjunction with the Bank's next shareholder communication and also (2) in conjunction with its notice or proxy statement proceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement or notice shall be sent to the FDIC at Washington, D.C., for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   12. On the last day of the second month following the date of issuance of this ORDER, and on the last day of every month thereafter, the Bank shall furnish written progress reports to the Regional Director detailing the form and manner of any action taken to secure compliance with the ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making further reports.
   13. While 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 should indicate how the brokered deposits are to be used with specific reference to credit quality of investments or loans and the effect on the Bank's funds position and asset/liability matching. The Regional Director shall have the right to object to the Bank's plans for using brokered deposits. So long as the level of brokered deposits equals or exceeds five {{4-1-90 p.A-797}}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.
   14. This ORDER shall become effective 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.
   Dated at Washington, D.C., this 24th day of March, 1986.
   /s/ Hoyle L. Robinson
   Executive Secretary

ORDER DENYING REQUEST FOR ORAL ARGUMENT
FDIC-85-42b

   By letter dated December 3, 1985, pursuant to section 308.17 of the Rules and Regulations, 12 C.F.R. § 308.17, * * * Bank, * * * ("Respondent"), requested permission to present oral argument to the Board of Directors of the Federal Deposit Insurance Corporation ("Board") with respect to the Board's deliberation on the above-captioned proceeding.
   After considering the Respondent's request and the allegations and arguments presented in the parties' briefs, the Board finds that (1) the factual and legal arguments are fully set forth in the parties' briefs and the Recommended Decision of the administrative law judge, (2) no benefit will be derived by the Board from oral argument, (3) Respondent has set forth in its request no reason that would justify exercise of the Board's discretion to grant oral argument, and (4) Respondent will not be prejudiced by lack of oral argument because of the complete record in the proceeding. Therefore, the Respondent's request for oral argument is DENIED.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 24th day of March, 1986.
   /s/ Hoyle L. Robinson
   Executive Secretary

FDIC 85-42b
APPEARANCES:

* * *
* * *
* * *
for the Federal Deposit Insurance Corporation
   BEFORE:
ANGELO G. NICCHITTA
Administrative Law Judge
RECOMMENDED DECISION AND ORDER TO CEASE AND DESIST

   On February 13, 1985, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Charges and of Hearing ("Notice") against the * * * Bank, * * * ("Bank") pursuant to the provisions of Section 8(b)(1) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. Section 1818(b)(1)) and Part 308 of the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308). The Notice charged that the Bank has engaged in specified unsafe or unsound practices within the meaning of Section 8(b)(1) of the Act in conducting the business of the Bank and has violated laws, rules and regulations. The Notice also called for a hearing to take evidence on the charges alleged in the Notice and to determine whether an appropriate Order to Cease and Desist ("Order") should be issued under Section 8(b)(1) of the Act. The Order would require the Bank to cease and desist from the specified unsafe or unsound practices and violations and require the Bank to take affirmative action to correct the conditions resulting from such practices and violations. Counsel for the Bank filed an Answer to the Notice ("Answer") on March 5, 1985, admitting certain allegations contained in the Notice and denying others. Counsel for the Bank and the FDIC entered into stipulations regarding certain facts and use of documents designated as FDIC Exh 1.
   The hearing began on June 24, 1985, in * * *, before Administrative Law Judge Angelo G. Nicchitta and concluded on June 28, 1985. The hearing record consists of a transcript in two volumes consisting of approximately 873 pages and designated TR at ____. The FDIC introduced eleven {{4-1-90 p.A-798}}exhibits designated FDIC Exh 1 through 11 and the Bank introduced thirteen exhibits numbered as RES Exh 1 through 13.
FINDINGS OF FACT
General Findings
   1. The Bank is a corporation existing and doing business under the laws of the State of * * * and has its principal place of business at * * *. It is, and has been at all times pertinent to this proceeding, an insured state nonmember bank. The Bank is subject to the Act (12 U.S.C. Sections 1811-1831d), the rules and regulations of the FDIC (12 C.F.R. Chapter III), and the laws of the State of * * *. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding. (Admitted in Answer)
   2. As of May 23, 1984:
   (a) The Bank's total equity capital and reserves equaled $2,306,000;
   (b) The Bank's total assets equaled $1,143,000;
   (c) The Bank's adjusted total assets equaled $19,853,000;
   (d) The Bank's total deposits equaled $18,567,000;
   (e) The Bank's total loans (after adjustment for unearned income of $115,000) equaled $14,076,000; and
   (f) The Bank's gross loans equaled $14,191,000
   (FDIC Exh 1; FDIC Exh 2 at 7,8)

   [.9] 3. The purpose of a bank examination is to maintain confidence in the banking system, provide a report of the bank's condition to the bank's management and to the FDIC, protect the FDIC's insurance fund and insure compliance with various laws and regulations. (TR at 12)
   4. The Bank was examined by * * * as of May 23, 1984, pursuant to FDIC guidelines and procedures. (TR at 13; FDIC Exh 2)
   5. The Bank has primarily an agricultural oriented customer base, in that more than 25 percent of the Bank's loans are agriculturally related. (TR at 111, 118)
   6. Mr. * * * is highly qualified to analyze and evaluate the financial condition of banks, including those with an agricultural customer base. (TR at 6–12, 106–107)
   7. Mr. * * *, the * * * Regional Office Assistant Regional Director, has geographic responsibility for the area including the Bank and is highly qualified to render opinions on the financial condition of banks. (TR at 376–379) In his capacity as an Assistant Regional Director, he is familiar with the financial condition of the Bank. (TR at 379)
   8. Based on a review of the Bank's internal documents and records and discussions with its management, the FDIC classified Bank assets by either passing the asset or specially mentioning it or assigning an adverse classification of Substandard, Doubtful, or Loss, depending on the degree of risk of loss in the asset. (TR at 24–27, 41)
   9. Assets classified Doubtful are known to contain an element of loss, but the precise amount cannot be identified. (TR at 26–27, 397).
   10. The Bank was assigned a composite rating of four by the FDIC under The Uniform Financial Institution's Rating System. (FDIC Exh 2 at 55; FDIC Exh 7) A four rating indicates that if certain actions are not taken, the Bank's future prospects are bleak and that it may eventually fail. (TR at 104, 411; FDIC Exh 7).
   11. As of May 23, 1984, the management of the Bank consisted of its board of directors and active management consisting of President * * * and Assistant Cashier * * *. (TR at 22)
Lending Practices
   12. The Bank's loan policy in effect as of May 23, 1984, is deficient because it failed to identify adequate collateral margins or the monitoring thereof. Capitalization of interest was also excessive. The policy also permitted the Bank to have an excessively high loan to deposit ratio of 75 percent. (FDIC Exh 4; TR at 356)
   13. The Bank engaged in hazardous lending and lax collection practices by violating certain principles of prudent loan administration by inappropriately capitalizing interest, extending credit to multiple borrowers where the source of repayment is dependent on one source or borrower, failing to establish and monitor collateral margins, and failing to obtain adequate collateral. (TR at 43–45, 54–55, 56, 68)
   14. The failure of the Bank to follow prudent lending practices exposed it to more than normal risk of loss in its loan portfolio and adversely impacted on the Bank's capital. (TR at 68-69, 80, 261)
   15. Capitalization of interest refers to the practice of including accrued and unpaid {{4-1-90 p.A-799}}interest in the principal amount of an extension of credit at renewal. (TR at 45)
   16. Inappropriate capitalization of interest exposes a bank to more than normal risk of repayment from a borrower unable to pay interest on the original amount of the indebtedness and inflates the Bank's earnings. (TR at 46–47, 88)
   17. The Bank inappropriately capitalized interest in the cases of * * * (FDIC Exh 2 at 24; TR at 56), * * * Farms, Inc. and * * * (FDIC Exh 2 at 26-27; TR at 60), * * * (FDIC Exh 2 at 26; TR at 63), * * * (FDIC Exh 2 at 26; TR at 65), * * * (FDIC Exh 2 at 28; TR at 65), * * * (FDIC Exh 2 at 28; TR at 65)
   18. Extensions of credit to multiple borrowers refers to the situation where the repayment of credit to one or more related borrowers is dependent on a single repayment source. (TR at 47, 163)
   19. Extensions of credit to multiple borrowers exposes a bank to a more than normal risk of repayment. (TR at 47, 405)
   20. The Bank extended credit to multiple borrowers in the case of * * * (FDIC Exh 2 at 24: TR at 57), * * * Farms and (FDIC Exh 2 at 26; TR at 59), * * * (FDIC Exh 2 at 27; TR at 62), * * * Farm and Home Supply and * * * and * * * (FDIC Exh 2 at 29; TR at 66).
   21. For a bank to establish and monitor its collateral margins, it must identify the difference between the amount of the loan and the value of the supporting collateral and thereafter maintain a reasonable differential. (TR at 47–49)
   22. The failure of a bank to establish and monitor its collateral margins exposes it to a more than normal risk of loss. (TR at 50)
   23. The Bank failed to establish and/or monitor collateral margins in the case of * * * (FDIC Exh 2 at 27; TR at 61) and * * * (FDIC Exh 2 at 27; TR at 65)
   24. Failure of a bank to obtain adequate collateral increases the risk of loss should the intended source of repayment not be realized. (TR at 51)
   25. The Bank failed to obtain adequate collateral in the case of * * * (FDIC Exh 2 at 24; TR at 56), * * * (FDIC Exh 2 at 26; TR at 62–63), * * * (FDIC Exh 2 at 25; TR at 65), * * * (FDIC Exh 2 at 28; TR at 65), * * * (FDIC Exh 2 at 29; TR at 66), * * * (FDIC Exh 2 at 31; TR at 66)
   26. The Bank had an adequate repayment program, but the failure of its borrowers to obtain adequate prices for their products often resulted in failure to meet payment schedules.
Conditions Resulting from Lending Practices
   27. The overall conditions of the Bank's loan portfolio is poor (FDIC Exh 2 at 1; TR at 36, 38) and there is a significant likelihood of future deterioration. (FDIC Exh 2 at 41; TR at 69, 70)
   28. A majority of the increase in adversely classified loans between June 10, 1983, and May 23, 1984, resulted from deterioration of previously unclassified loans. (FDIC Exh 2 at 1, 41)
   29. The poor condition of the Bank's loan portfolio resulted from improper and imprudent lending practices. (TR at 68–69)
   30. As of May 23, 1984, the Bank's adversely classified loans equaled $3,645,000 or 25.9 percent of the Bank's total loans. (FDIC Exh 2 at 7; TR at 36)
   31. The total of the Bank's adversely classified loans is excessive. (TR at 36, 774)
   32. The Bank's adversely classified loans as a percentage of total loans represents a significant deterioration from the Bank's June 10, 1983, FDIC examination, at which time 11.34 percent of the Bank's loans were adversely classified. (FDIC Exh 3 at 5; TR at 36)
   33. As of May 23, 1984, loans were adversely classified by the FDIC as $2,655,000 Substandard, $277,000 Doubtful, and $713,000 Loss. (FDIC Exh 2 at 7)
   34. The other real estate asset category refers to real estate held by the Bank that formerly had secured a loan to the borrower who defaulted on that obligation. (TR at 39)
   35. Other real estate is a nonearning or very low earning asset for the Bank. (TR at 173)
   36. As of May 23, 1984, the Bank's adversely classified other real estate totaled in excess of $552,000, an amount which is substantial and has had an adverse impact on the Bank's earnings. (FDIC Exh 1 at 7; TR at 31–32, 585).
   37. The Bank's net loan chargeoffs of $243,000 for 1983 were twice what the {{4-1-90 p.A-800}}FDIC typically sees in banks that it examines of that size. (TR at 90; FDIC Exh at 9)
   38. The Bank's poor earnings and earnings prospects result from the Bank's criticized lending practices. (TR at 90–91; FDIC Exh 2 at 9)
   39. The Bank's return on assets for 1983 was zero, whereas it was 1.1 percent for other Midwestern agricultural banks in that period. (RES Exh 1 at 14)
   40. The income earned but not collected asset category represents accrued interest on a loan that a Bank has taken into its income but not yet collected in cash from the borrower. (TR at 32)
   41. Income earned but not collected is given an adverse classification by the FDIC when the loan itself is adversely classified. (TR at 32)
   42. As of May 23, 1984, the Bank's adversely classified income earned but not collected totaled in excess of $209,000, an amount indicative of the poor condition of the Bank's loan portfolio. (FDIC Exh 2 at 7; TR at 33)
   43. The Bank's loan losses as a percentage of loans exceeded the experiences of other Midwest agricultural banks for 1983 (RES Exh 1 at 14)
   44. As of May 23, 1984, the Bank's other real estate, income earned but not collected and other assets adversely classified totaled $501,000 Substandard and $311,000.00 Loss. (FDIC Exh 2 at 7)
   45. As of May 23, 1984, 99 of the Bank's loans in the aggregate amount of $2,083,000 or 14.68 percent of the Bank's gross loans, were overdue, an amount approximately three times that of the June 10, 1983 examination. (FDIC Exh 1; FDIC Exh 2 at 7,42; TR at 37)
   46. The Bank's number and percentage of overdue loans as of May 23, 1984, is three to four times what the FDIC normally sees in banks it examines. (TR at 38, 212)
   47. As of May 23, 1984, the Bank had 21 loans in the aggregate amount of $327,000 that were overdue 90 days or more with interest continuing to be accrued by the Bank. (FDIC Exh 1) The practice of accruing interest on loans 90 days or more overdue distorts a bank's earnings and is inconsistent with FDIC's instructions for preparation of call reports. (TR at 39)
   48. The Bank had an excessive 35 loans totaling $1,677,000 on non-accrual status as of May 23, 1984. (FDIC Exh 1; TR at 40–41)
   49. Past due status of a loan is a significant indicator of weakness in a Bank's loan portfolio and the Bank's collection Practices. (FDIC Exh 2 at 2; TR at 39)
   50. As of May 23, 1984, the Bank had 17 loans in the aggregate amount of $586,000 or 4 percent of its gross loans and 28.13 percent of total overdue loans, 6 months or more overdue. (FDIC Exh 1; FDIC Exh 2 at 42; TR at 38) The 6 month or more overdue category of past due loans is itself equivalent to what the FDIC typically sees as a past due ratio in banks that it examines. (TR at 39)
   51. The Bank permitted the amount of debt to farmers to increase as collateral value declined (TR at 67, 243, 246) rather than seeking prudent alternatives such as transferring the loan to a federal farm credit agency, seeking alternative sources of refinancing, obtaining guarantees, restructuring the loan by placing it on a longer term repayment schedule, and otherwise monitoring the loan. (TR at 236, 242, 256)
   52. While the financial condition of loans at agriculture banks improved somewhat in 1984, the condition of the Bank worsened. (RES Exh 1 at 10: FDIC Exh 2 at 1; TR at 339)
Dividends
   53. The Bank paid dividends of $264,000 in 1983 and through May 23, 1984, while its net income for this period was $126,000. (FDIC Exh 1)
   54. A Bank dividend of $132,000 declared in the first calendar quarter of 1984 is not supported by Bank earnings generated during that same period of $126,000. (TR at 88, FDIC Exh 2 at 8)
   55. The purpose of the $132,000 dividend was for the repayment of indebtedness incurred by the company that controls the Bank. (TR at 89; FDIC Exh 2 at 52) The holding company is wholly dependent on Bank earnings to meet its debt servicing requirements. (TR at 89)
   56. Payment of dividends by the Bank is an unsafe or unsound banking practice based on the Bank's earnings. (TR at 90)
Liquidity

   [.10] 57. Liquidity refers to the ability of a bank to provide, in a cash effective man- {{4-1-90 p.A-801}}ner, for decreases in its deposits and increases in its assets.

   [.11] 58. As of May 23, 1984, the Bank's liquidity was inadequate based on the Bank's very high loan to deposit ratio, history of borrowings, and high volume of adversely classified assets. (TR at 91, 93, 356 and 407)
   59. As of May 23, 1984, the Bank had a loan to deposit ratio of 75.8 percent (answer at 7). This ratio is much higher than the loan to deposit ratios of other agriculturally oriented banks examined by the FDIC. (TR at 407)
   60. The Bank's loan to deposit ratio was excessively high both as a banking standard and when the quality of the Bank's assets are taken into account. (TR at 92, 494, 827, 829)
   61. A high loan to deposit ratio adversely affects a bank's liquidity by reducing the bank's ability to invest in cash or cash equivalent items. (TR at 92, 406) A high volume of adversely classified assets adversely impacts on a bank's liquidity since a bank is less likely to be able to sell inferior quality assets to meet cash needs. (TR at 93)
   62. As of May 23, 1984, the Bank had been a net borrower of funds for 195 days during the period of June 10, 1983, through May 23, 1984.
   63. As of May 23, 1984, the Bank's funds management policy was inadequate. (FDIC Exh 2 at 4; TR at 95)
Violations
   64. In August 1982, the Bank extended credit in the name of * * * and * * * in the amount of $225,000, with funds being deposited into the account of * * * Farm and Home Supply, Inc. At the time of that advance, * * * Farm and Home Supply, Inc. was obligated on credit to the Bank in the amount of $164,000. The total of the two extensions of credit exceeded 15 percent of the Bank's capital and surplus, or $255,000. (FDIC Exh 2 at 12; TR at 97)
   65. Bank extensions of credit to * * * and to * * * Equipment Sales were classified Substandard at the FDIC June 10, 1983, and May 23, 1984 examinations of the Bank. (FDIC Exh 3 at 20; FDIC Exh 2 at 25) * * * , the Bank's cashier, signed an unlimited guarantee for the * * * line of credit and a guarantee for $35,000 on * * * equipment sales line of credit. (FDIC Exh 2 at 12)
   66. The Bank renewed both the * * * and * * * Equipment sales lines of credit subsequent to the FDIC's June 10, 1983 examination of the Bank. (FDIC Exh 2 at 12; TR at 98)
Loan Valuation Reserve

   [.12] 67. The purpose of a loan valuation reserve is to absorb potential loan losses in those loans classified Substandard and all other unrecognized losses in the loan portfolio. (TR at 75)
   68. As of May 23, 1984, the Bank's loss valuation reserve was $305,000. (TR at 75)
   69. The Bank's loan valuation reserve as of May 23, 1984, was inadequate in relation to the loss identified in the Bank's loan portfolio at that time. (TR at 75, 398)
   70. The Bank failed to make any provision for loan losses during the first calendar quarter of 1984. (TR at 77; FDIC Exh 2 at 9) A provision for loan loss was necessary at that time based on the condition of the Bank's loan portfolio and reasonable expectation of additional loss. (TR at 77, 78)
   71. The Bank's inadequate loan valuation reserve overstated its earnings and capital. (TR at 75-76, 77, 88)
   72. A loan valuation reserve of at least $300,000 after charge off of Loss, or 2 percent of the Bank's total loans, is necessary to absorb unanticipated losses in the Bank's loan portfolio. (TR at 78)
   73. The Bank was engaged in an unsafe and unsound banking practice by operating with a loan valuation reserve of $305,000 as of May 23, 1984, which did not take into account the substantial loss in the * * * line of credit. (TR at 75)
   74. Potential bank investors and directors, the public, and bank customers rely on a bank's published financial information in making informed judgments on a bank's condition. (TR at 400, 806-07)
Capital
   75. A bank's adjusted capital is calculated by subtracting from a bank's total equity capital and reserves those assets classified Loss and 50 percent of those classified Doubtful. (TR at 78–79)
{{4-1-90 p.A-802}}
   76. A bank's adjusted assets are a bank's total assets plus its loan valuation reserve less 50 percent of assets classified Doubtful and all assets classified Loss. (TR at 74)
   77. As of May 23, 1984, the Bank's adjusted equity capital and reserves of $1,143,000 represented 5.76 percent of its adjusted total assets (Capital ratio) of $19,852,000. (FDIC Exh 2 at 8; TR at 74, 79)
   78. The Bank is engaged in an unsafe or unsound banking practice by operating with an adjusted capital ratio of 5.76 percent as of May 23, 1984. (TR at 80)
   79. As of May 23, 1984, adversely classified assets of the Bank not reflected in the Bank's adjusted capital and reserve totaled $3,294,000, an amount greatly in excess of the Bank's adjusted equity capital. (FDIC Exh 2 at 7, 8)
   80. The equity capital ratio of banks with a similar customer base as the Bank is approximately 8 to 9 percent (TR at 81; RES Exh 2 at 14).
   81. A minimally adequate capital ratio for the Bank is 8 percent. (TR at 81, 381)
   82. The 8 percent capital ratio for the Bank as of May 23, 1984, would require an injection of approximately $500,000. (TR at 81, 382) However, the capital ratio has increased in the last 18 months and it now appears that substantially less than that amount is required.
   83. The Bank's earnings are inadequate to support Bank equity capital needs. (TR at 87, 88, 393; FDIC Exh 2 at 9)
   84. As of May 23, 1984, the Bank's total of $4,457,000 in adversely classified assets was 193.28 percent of the Bank's total equity capital and reserves. (FDIC Exh 2 at 7, 8; TR at 35, 73) This percentage is excessive and is approximately 5 times what the FDIC typically sees in banks it examines in the Bank's own market area. (TR at 73-74)
   85. As of May 23, 1984, the Bank's adversely classified assets equaled 21.52 percent of its total assets, a percentage indicative of significant deterioration in the Bank's assets since the June 10, 1983, FDIC examination, at which time the ratio was an excessive 9.43 percent. (FDIC Exh 2 at 7; FDIC Exh 3 at 5; TR at 35)
   86. The Bank's equity capital ratio as of March 31, 1985, was made independently of any analysis of the Bank's records by the FDIC and does not reflect any additional loan deterioration as assessed by the FDIC (RES Exh 2; TR 346, 383-85) or the legitimacy of an "other asset" figure of $920,000. (TR 346-47)
   87. The Bank's inadequate equity capital ratio was caused by losses (charge-offs) resulting from the Bank's hazardous lending and lax collection practices. (TR at 80)
   88. The Bank's equity capital is inadequate in relation to the Bank's earnings, asset condition, and liquidity. (FDIC Exh 5; TR at 81–82, 88, 100–104)
Management Supervision
   89. The Bank's management was notified by the FDIC of the Bank's vulnerability to an adverse economy as of the June 10, 1983, report of examination. (FDIC Exh 3 at 1)
   90. The FDIC criticized Bank management's decision to maintain a high loan to deposit ratio as of the June 10, 1983, report of examination. (FDIC Exh 3 at 1, 2).
   91. Despite warnings and notification by the FDIC to Bank management as of the June 10, 1983, report of examination and a meeting with Bank management on November 17, 1983, at which time Bank management made commitments to strengthen the Bank, the condition of the Bank continued to deteriorate. (FDIC Exh 3 at 1-4; FDIC Exh 8; FDIC Exh 9; TR at 101-102, 152-53, 388)
   92. Bank management refused to sign an informal corrective program with the FDIC that addressed the condition of the Bank as of the June 10, 1983, examination. (FDIC Exh 8; FDIC Exh 11)
   93. The commitments offered by the Bank management in lieu of the informal corrective program did not address all FDIC concerns, in that the Bank commitments permitted the Bank to achieve a loan to deposit ratio of 75 percent and a loan valuation reserve of 1 percent of loans. (FDIC Exh 11; RES Exh 6; TR at 696)
   94. The June 10, 1983, FDIC report of examination criticized the Bank's loan policy. (FDIC Exh 3 at 9; TR at 342)
   95. Bank management was responsible for the failure of the Bank to have an adequate loan policy as of May 23, 1984. (TR at 72; FDIC Exh 4)
   96. The Bank management's failure to make a provision for loan loss in the first quarter of 1984 occurred at a time when {{4-1-90 p.A-803}}Bank management should have been aware of Bank losses. (TR at 77, 78, 189)
   97. The Bank's management failed to comply with its own corrective program forwarded to the FDIC, in that Substandard loans were not reduced by December 31, 1984. (RES Exh 6 at 2; RES Exh 12; TR at 556)
   98. Bank management represented to the FDIC as of October 14, 1983, that its earnings for 1983 would be 1.20 percent of average assets, whereas earnings for that period were actually zero. (FDIC Exh 10 at 2; FDIC Exh 2 at 9; TR at 393)
   99. The entire board of directors of the Bank approved the actions taken by the Bank in the loans criticized by the FDIC as of May 23, 1984. (TR at 565, 700, 872)
   100. Bank management commitments made at the conclusion of the FDIC's June 10, 1983, examination were not responsive to FDIC concerns with regard to the Bank's loan valuation reserve and loan to deposit ratio. (FDIC Exh 3 at 3–4; FDIC Exh 8; TR at 691, 709)
   101. The decision of Bank management to capitalize an expense in the * * * loan is contrary to prudent and accepted banking practice. (FDIC Exh 2 at 2, 17; TR at 34)
   102. Inappropriate capitalization (sic) of expense by Bank management in the case of the * * * loan resulted in an overstatement of the Bank's earnings by $36,000, a material amount in relation to the Bank's earnings as of April 30, 1984. (TR at 193-94)
   103. The failure of Bank management to establish and maintain a "watch list" as of May 23, 1984, is contrary to prudent and accepted banking practice. (FDIC Exh 2 at 2; TR at 93–94)
   104. Bank management is responsible for the violations of law and regulations noted as of May 23, 1984. (TR at 98; FDIC Exh 2 at 12)
   105. Bank management was rated "four" as of May 23, 1984, by the FDIC pursuant to its "CAMEL" rating system based on the deterioration of the Bank's condition between 1981 and 1984. (FDIC Exh 2 at 55; TR at 101–103)
   106. The management of the Bank was responsible for paying a dividend when it was not supported by Bank earnings. (TR at 331, 333; FDIC Exh 2 at 9)
   107. Bank management was notified as of the June 10, 1983, FDIC report of examination that the Bank's past due ratio was understated due to capitalization of interest. (FDIC Exh 3 at 1)
   108. As of May 23, 1984, a majority of bank's directors were employees of the Bank. (FDIC Exh 2 at 57)
   109. Appointment of two additional outside directors to the board of directors of the Bank would improve the quality of the Bank's management. (TR at 395-96, 279)
   110. Bank management continued to capitalize interest on loans after being criticized for such practice as of June 30, 1983. (FDIC Exh 2 at 1)
   111. As of May 23, 1984, the Bank management was not conducting frequent onsite farm visitations. (FDIC Exh 2 at 1)
   112. Bank management is responsible for the Bank's inadequate loan valuation reserve as of May 23, 1984; it failed to review the loan reserve and make appropriate adjustments. (TR at 76, 77)
   113. Bank management is responsible for the Bank's excessive amount of adversely classified income earned but not collected since the shifting of a loan to nonaccrual status is within the power of Bank management. (TR at 33–34, 187, 188, 345)
   114. Bank management contributed to an overstatement of Bank earnings by capitalizing interest and failing to provide for an adequate reserve for loan losses. (TR at 88)

CONCLUSIONS OF LAW
   1. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding.
   2. The FDIC has the authority to issue an Order to Cease and Desist against the Bank pursuant to Section 8(b)(1) of the Act.
   3. The Bank has engaged in unsafe or unsound practices within the meaning of Section 8(b)(1) of the Act by engaging in hazardous lending and lax collection practices, including the following:
   (a) extending credit, supported by insufficient or illegal collateral;
   (b) renewing credit with inappropriate capitalization of interest;
   (c) failing to establish and monitor collateral margins of secured borrowers;
{{4-1-90 p.A-804}}
   (d) extending an excessive volume of credit to related entities with the credit being supported by the repayment ability of only one of the entities.
   4. As a result of the Bank's hazardous lending and lax collection practices, the Bank has an excessive volume of poor quality loans.
   5. The Bank has engaged in unsafe or unsound banking practices within the meaning of Section 8(b)(1) of the Act by operating with an inadequate level of capital protection for the kind and quality of assets held by the Bank.
   6. The Bank has engaged in unsafe or unsound banking practices within the meaning of Section 8(b)(1) of the Act by paying dividends that are excessive in relation to the Bank's net income and equity capital requirements.
   7. The Bank has engaged in unsafe or unsound banking practices within the meaning of Section 8(b)(1) of the Act by operating with inadequate liquidity.
   8. The Bank has engaged in unsafe or unsound practices within the meaning of Section 8(b)(1) of the Act by operating with an inadequate loan valuation reserve.
   9. The Bank has violated Section 22(h) of the Federal Reserve Act, as amended (12 U.S.C. Section 375b) and Regulation O of the Board of Governors of the Federal Reserve System as promulgated thereunder and made applicable to insured State nonmember banks by Section 18(j)(2) of the Act. 12 U.S.C. Section 1828(j)(2))
   10. The Bank's management has promulgated policies and practices which are detrimental to the Bank and jeopardize the safety of its deposits.

ISSUES AND RATIONALE
   Primarily at issue in this case is the content of the Cease and Desist Order sought by the Federal Deposit Insurance Corporation (hereafter FDIC) against certain practices of the * * * Bank, * * * (hereafter Bank). The respondent Bank has agreed in general terms to the issuance of a Cease and Desist Order. It challenged the FDIC's proposed Order to obtain modifications in specific provisions of the Order because the Bank felt certain provisions of the Order were unnecessary, unacceptable, or impossible of performance. While primarily challenging the specific provisions of the Order, the Bank has also denied that it has been operated in an unsound or unsafe manner or that the FDIC has proven the requisite unsound banking practices.
   Although the Bank has not strenuously challenged the issuance of a Cease and Desist Order in this case, the undersigned Administrative Law Judge has concluded that there are several preliminary issues which must be dealt with before the specific terms of the Cease and Desist Order are enumerated. The first preliminary issue is whether the Bank was operated in an unsafe or unsound manner or whether Bank managers engaged in unsound banking practices. The second issue is whether changes or improvements in the bank situation made since the bank examination of May 1984 should be taken into account in determining whether a Cease and Desist Order should issue and what form that Order should take. The third question, which is really a part of the Bank's defense to the charge of unsafe or unsound banking practices is whether economic conditions in the area where the Bank is located can be considered the primary cause for the Bank's deteriorating classification percentage, liquidity position, and capital to asset ratio. These issues will be considered before the specifics of the Cease and Desist Order are considered.
Unsafe or Unsound Bank Practices
   It is provided in Section 8(b)(1) of the Federal Deposit Insurance Act (Title 12 U.S.C. Section 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, {{4-1-90 p.A-805}}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 practice in 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).
   While the Act refers to "unsafe and unsound" banking practices, it does not define that phrase or enumerate specific acts and conduct which constitute such practices. A memorandum introduced during the committee hearings on the Financial Institution Supervisory Act of 1966 provides some clarity as to what constitutes unsafe and unsound banking practices. That memorandum of John E. Horne, who was Chairman of the Federal Home Loan Bank Board, provided in part:
   ...[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 any 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 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.
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).

   [.13] Also as noted by the FDIC, the courts have accepted the Comptroller of the Treasury's definition of the phrase "unsafe and unsound." First National Bank of Eden v. Department of the Treasury, 568 F.2d 610 (8th Cir. 1978) and First National Bank of La Marque v. Smith, 610 F.2d 1258 (5th Cir. 1980). As pointed out by the Eighth Circuit in considering the First National Bank of Eden case, which also involved an action under Section 8(b) of the Act, "the Comptroller suggests that these terms [unsafe and unsound] 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." Supra at 611. Moreover, the courts have not attempted to substitute their judgment in cases involving alleged "unsafe and unsound" practices; rather, the agencies' findings are reviewed to determine if they are reasonable or rationally connected with the evidence as a whole. See Abilene Sheet Metal, Inc. v. National Labor Relations Board, 619 F.2d 332, 337 (5th Cir. 1980) and J.H. Rose Truck Line, Inc. v. Interstate Commerce Commission, 683 F.2d 943, 948 (5th Cir. 1982).
   In the case at hand, the undersigned Administrative Law Judge has determined that there has been action contrary to generally accepted standards or prudent operation which has resulted in damage to the institution and an abnormal risk of loss. The Bank has been operated in an unsafe or unsound manner despite the respondent's attempts to characterize its current position as being the result of economic conditions in the nation at large and in * * * County, where the Bank is located, in particular. The Bank has admitted that it has experienced significant asset problems, but it has attempted to characterize these problems as unsafe or unsound conditions rather than as the result {{4-1-90 p.A-806}}of unsafe or unsound practices. The Bank points to the general decline in farm prices and the depression of agricultural land values in the * * * County area as the primary cause of its liquidity problems and its abnormally high classification ratio. While there can be no question that economic conditions in rural areas have increased the possibility of loan losses for agricultural banks, this fact by itself does not excuse unsafe or poor management and it clearly does not completely explain the high percentage of classified loans at the * * * Bank. It is clear that sound management practice requires bank officers to adjust to changing economic conditions, not simply throw up their hands and then reply, "But what could we do? Times were bad."
   The decline in farm prices and the depression of agricultural land values did not develop overnight. The situation at * * * Bank, detailed by Mr. * * * 1984 examination and by his testimony at the hearing, developed over a four year period. As the Bank admits, its level of classified assets had been steadily increasing since 1981. That increase, coupled with the recession in the national economy and a virtual depression in certain rural economies, would have resulted in more conservative loan policies at a bank operated more soundly than the * * * Bank. Changes in capitalization practices, lending policies, and collateral levels were certainly warranted long before the May 23, 1984, examination of the * * * Bank by Mr. * * *. In addition, testimony at the hearing indicated that the classification percentage at * * * Bank substantially exceeded that of even other Midwest agricultural banks which were experiencing essentially the same economic downturn. Clearly, other agricultural banks made adjustments in their banking practices which enabled them to continue operation in a safe and sound manner despite economic adversity in the region where they were located. On the other hand, the * * * Bank did not make those adjustments and, as a result, its overall position is much worse.
   The specifics of unsafe and unsound practices which the undersigned has found were engaged in were fully presented by the FDIC through its documentary exhibits and the oral testimony at the hearing. With regard to lending policies, it is noted that the loans made to * * * and * * * in the amount of $225,000 were definitely questionable. A business owned by those individuals was already obligated to the * * * Bank in the amount of $164,000. The total outstanding loans to these individuals of approximately $400,000 were a significant portion of the Bank's total capital and surplus and they represented an instance of the extension of credit to multiple borrowers where only one source of repayment actually existed. Other instances of unsound practices included the Bank's extension of credit to individuals whose previous loans had already been classified Substandard during an earlier examination of the Bank by Federal Deposit Insurance Corporation examiners in 1983. The Bank's percentage of classified loans increased dramatically after the 1983 examination even though Bank management had made certain representations to the FDIC after that examination that it would mend a variety of banking practices. In particular, capitalization of interest continued after the 1983 examination in the case of individuals who had been unable to pay outstanding interest for several years in succession. These loans clearly represented excessive capitalization of interest; an unsound or unsafe banking practice.
   Another unsound or unsafe banking practice engaged in by * * * Bank management was failure to monitor collateral values. On several occasions, livestock offered as collateral for a loan died after a period of starvation. Obviously, Bank employees had not regularly visited the borrower's farm to ascertain whether the animals securing the operating loan were in good condition.
   In making the determination that the Bank has engaged in unsafe and unsound practices within the meaning of Section 8(b)(1) of the Federal Deposit Insurance Act (Title 12 U.S.C. Section 1818(b)(1)), the undersigned has considered the Bank's argument that the FDIC is trying to usurp management's authority in the area of foreclosures. While it is clear that foreclosure is one alternative to excessive capitalization of interest, the decision of whether to foreclose on a particular loan or capitalize interest or obtain additional collateral still rests in any particular case with the respondent Bank. The FDIC has not suggested that foreclosure is the only alternative to excessive capitalization of interest and it is not suggesting a bank foreclose in any individual case. Rather, in the aggregate, the continual capitalization of interest and the extension of additional credit to borrowers {{4-1-90 p.A-807}}regularly unable to meet repayment schedules constitutes an unsafe or unsound banking practice. Management still has the authority to make decisions in individual cases in this area, but repeated instances of unwise choices in the face of changing economic circumstances must be considered unsafe and unsound. The compassion felt by Bank management for longtime borrowers caught in a web of agricultural business decline and possible overextension of their farms must be balanced against the Bank's responsibility to protect its depositors; the other half of the banking equation. Likewise, while foreclosure would have resulted in the Bank sustaining some losses due to declining collateral values, it is obvious that these losses would have been minimized had action been taken to eliminate questionable loans in 1981 or 1982 rather than waiting until 1983, 1984, 1985, or possibly never.
   Considering the seventy year downward trend in the number of farm businesses in this country and the bleak outlook for any dramatic turnaround in near term farm prices, it was unrealistic of the Bank to conclude that its troubled borrowers would have substantially improved chances of meeting their repayment schedules in years to come. The undersigned does not agree with the Bank's position that it was in the best interests of either its depositors or its borrowers to repeatedly extend credit to farm operators in the hopes that they would eventually work their way out of their economic problems. In raising this question, the Bank asserted that it did not mean to imply that it would never foreclose. The question arises, of course, that if the Bank would not foreclose in the period 1981 through 1985, then when would it? Documentary evidence present in the record before the undersigned indicates that the average Midwest and Great Plains agricultural bank had a ratio of adversely classified loans to equity capital and resources of 50.7 percent in 1983 and 44.5 percent in 1984. The respondent bank's ratios were 94.32 percent as of June 10, 1983, and 193.28 percent as of May 23, 1984. (FDIC Exh 2 at 8) Clearly, while other agricultural banks in the Midwest were working their way out of the difficulties caused by the 1982 recession, the * * * Bank's position was deteriorating further. The testimony of Deputy * * * at the hearing indicates that the Bank was rated significantly lower with regard to classification ratios than other banks even in the same county. Obviously, the deteriorating financial picture at the * * * Bank was caused by factors other than economic difficulties in the nation at large and in the agriculture economy in particular. Those factors included excessive capitalization of interest, the extension of credit to multiple borrowers where only one source of repayment existed, and failure to monitor collateral values. These constituted unsafe and unsound banking practices.

   [.14] The final preliminary matter to be considered is whether improvements made by the Bank and changes in practices should be considered in the issuance of a Cease and Desist Order. The Bank has objected to a number of the specific provisions requested by the FDIC in its proposed Cease and Desist Order because it feels that the conditions which warranted those provisions have been corrected. However, the case law in this area uniformly states that correction of deficiencies is not a defense to a Cease and Desist Order. The issue was most recently considered by the U.S. Court of Appeals for the 5th Circuit in an unpublished decision dated March 12, 1985, a copy of which was furnished to the respondent and the undersigned in the brief of the FDIC. In Bank of Dixie v. Federal Deposit Insurance Corporation, No. 84-4737 (5th Cir. 1985), the Bank of Dixie appealed the issuance of a final Order to Cease and Desist issued by the FDIC on the grounds, inter alia, that the FDIC failed to consider evidence of improvements made by that bank in its operating procedures. The Court rejected that condition and ruled that a Cease and Desist Order is necessary to assure the FDIC that the bank will not resume the unsound or unsafe banking practices which have been established. Other courts have also mentioned the unreliability of the continuance of corrective actions and/or the potential for resumption of the discontinued practices or violations where corrective action has been taken only after a regulatory agency has instituted enforcement action. The Cease and Desist Order is meant to insure the bank's continued compliance with safe and sound banking practices as much as to correct the specific liquidity and classification problems discovered. In addi {{4-1-90 p.A-808}}tion, it must be pointed out that if the bank has already complied with many of the provisions of the Cease and Desist Order, they can hardly be considered onerous. The inclusion of the provisions the bank feels have been complied with will merely insure that the correction of deficiencies and the maintenance of an adequate capital to asset ratio and loan loss reserve and not solely dependent on voluntary measures taken by the Bank.
Specific Provisions of the Cease and Desist Order
   While the undersigned has concluded that the Bank did engage in certain unsafe and unsound banking practices, he has not been persuaded that every provision of the FDIC's proposed Cease and Desist Order is warranted by the facts established in this case. In particular, the Administrative Law Judge has concluded that that portion of the FDIC's requested Order dealing with changes in bank management personnel is inappropriate. The Administrative Law Judge is not persuaded that the replacement of the Bank's current president and chief executive officer, * * * , is within the purview of a Cease and Desist Order. Requiring management to be approved by the FDIC Regional Director gives the FDIC the power to remove Mr. * * * without complying with Section 8(e) of the Federal Deposit Insurance Act. There is no evidence in this case of personal dishonesty or a substantial disregard for the safety of the institution on the part of the managers of the * * * Bank. Nor is there substantial evidence that their activities will lead in the future to substantial loss to the Bank or that the interests of the depositors will be seriously prejudiced. The remedy in this situation must be focused on the unsound and unsafe practices, not with the personnel involved. In addition, the unsound or unsafe practices resulted from unwillingness to take necessary corrective action against borrowers, many of whom were longtime customers of the Bank, rather than from any scheme for gain on the part of the bank officers or directors. It is clear that Congress intended removal of a bank officer to be more difficult than the mere issuance of a Cease and Desist Order. In addition, the Bank has a point when it asserts that removal of the Bank managers or its chief executive officer could further erode the financial situation of the institution by causing a loss in public confidence. Unfortunately, many of the Bank's depositors would assume the worst if a removal action were taken. They would conclude that personal dishonesty or looting of bank assets were involved rather than unsafe or unsound practices which could be corrected. A significant drop in deposits could result which would only increase liquidity problems at the * * * Bank. On the other hand, the FDIC's recommendation that independent new members be added to the Board of Directors is entirely reasonable. It is possible that a different outlook will be represented if new members are appointed to the Board of Directors. Also, new ideas for the solution of the Bank's problems could be generated by individual's looking at the problem for the first time. The Bank's contention that there might be serious consequences if additional members are added to the Board of Directors because information concerning the Bank's financial status could become public knowledge has little merit. It is unlikely that information regarding the Bank's situation has not already made its way to the general public. In a town the size of * * * , it is unlikely that some word of the Bank's financial problems has not already reached the populace. The addition of a few directors or stockholders will not seriously increase the risk of disclosure. Rather, the knowledge that new "blood" is being added to the decision making group at the Bank and that new capital is being invested would more than outweigh the likelihood of additional disclosure of the Bank's financial situation.
   Although the Administrative Law Judge has concluded that certain unsafe or unsound banking practices were engaged in by the * * * Bank and that the FDIC has proven its case in these areas, the undersigned is not persuaded that the Bank failed to have adequate repayment programs or that it did not establish realistic performance standards. As the Bank points out, it has had a watch program on problem loans since 1982 and it had repayment programs. (TR 573, RES Exh 10 at 3, and TR 587-599) The Bank's problems arose not because it did not have repayment schedules or a monitoring program, but because those payment schedules were not met as a result of market declines and adverse weather conditions. These outside factors, coupled with the Bank's failure to take corrective action when its monitoring programs {{4-1-90 p.A-809}}should have provided information regarding additional borrower difficulties, led to the increase in classified loans and declining liquidity. The Bank's classification percentage, reduced loan reserves, poor liquidity, and inadequate capital level resulted from unsound lending practices and from the inability to take corrective action not from inadequate information.
   The undersigned notes that the Bank has also objected to that provision of the Cease and Desist Order regarding written approval by the FDIC of any dividend payments considered by the Bank. The Administrative Law Judge has rejected the argument of the Bank in this area. It is clearly unreasonable for the * * * Bank to pay dividends when it is losing money and has no income. The declaration of dividends can only further erode the capital base of the Bank and diminish its liquidity position. The fact that dividend payments must be approved by the * * * Banking Commission is irrelevant. The FDIC need not relinquish part of its authority and jurisdiction merely because a State regulatory agency also has some responsibilities in the area. In addition, the two agency standards for dividend payments clearly differ. The * * * Banking Commission has obviously approved dividend payments in the past which both the undersigned and the FDIC consider unreasonable.
   With regard to other specific provisions of the Cease and Desist Order, the undersigned agrees with the Bank that requiring it to republish its call reports to reflect retroactive changes in loan loss reserves is unreasonable. The Bank's reports were accurate when published and the purpose of republishing them has not been made clear by the FDIC. Likewise, there is no evidence that the Bank ever used brokered deposits or that it considered using such deposits. The inclusion in the Cease and Desist Order of a requirement that the Bank not use such deposits in the future gratuituously implies that they have engaged in additional unsound and unsafe practices in the past in addition to those established by the record. Accordingly, that portion of the Order requested by the FDIC has been stricken.
   One of the specific recommendations of the FDIC in its proposed Cease and Desist Order with which the Bank disagrees is a requirement that it maintain equity capital and reserves at not less than 8 percent of adjusted total assets. The undersigned finds that this request by the FDIC is reasonable and not arbitrary and capricious in light of the facts of this case. Other agricultural banks in the same geographic region as the * * * Bank have ratios in the 8 to 9 percent level upon an adjusted basis. In light of the fact that the respondent Bank's financial position is even worse than that of other agricultural banks in the Midwest and that its total adversely classified assets as a percentage of its total equity and capital reserves was five times the normal amount than other banks examined by the FDIC, an 8 percent capital ratio would not seem to be unreasonable. As recently as June 1983, the Bank's adjusted capital ratio was as high as 9.32 percent. That ratio had declined to 5.76 percent by May 23, 1984, as a result of the unsound and unsafe practices engaged in by Bank management. A capital ratio of only 7 percent as proposed by the Bank would obviously be too low given the recent history and performance of Bank management. The 2 percent loan loss reserve provision requested by the FDIC and the scheduled reductions and classified assets are also justifiable under similar rationale.

RECOMMENDED ORDER TO CEASE AND DESIST
   IT IS HEREBY ORDERED, that the Bank, its directors, officers, employees, agent, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe or unsound banking practices and violations of laws, rules, and regulations:
   (a) Engaging in hazardous lending and lax collection practices.
   (b) Operating with an inadequate level of capital protection for the kind and quality of assets held.
   (c) Operating with an inadequate level of loan loss reserve for the volume, kind, and quality of loans held.
   (d) Operating with inadequate liquidity.
   (e) Paying excessive cash dividends in relation to the Bank's net income.
   (f) Operating in violation of Section 22(h) of the Federal Reserve Act, as amended, (12 U.S.C. 375b), and Regulation O of the Board of Governors of the Federal Reserve {{4-1-90 p.A-810}}System (12 C.F.R. Part 215), ("Regulation O") promulgated thereunder, and made applicable to insured State nonmember banks by Section 18(j)(2), as more fully set forth on page 6-a of the Report of Examination prepared by the FDIC on May 23, 1984.
   IT IS FURTHER ORDERED, that the 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) Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall increase its total equity capital and reserves to $500,000 or the amount necessary to bring its capital to asset ratio to 8 percent, whichever is less.
   (b) Within thirty (30) days from each June 30th and December 31st following the date of compliance with paragraph 1(a), the Bank's board of directors shall review the Bank's total equity capital and reserves as a percent of its total assets. If any such review indicates a level of total equity capital and reserves of less than 8 percent of total assets as of the applicable semi-annual date, the Bank's board of directors shall, within sixty (60) days from the date of the review, take all steps necessary to increase that relationship to not less than 8 percent as of that semi-annual date. Total equity capital and reserves and total assets shall be calculated in accordance with prevailing instructions for the preparation of Reports of Condition required by the FDIC.
   (c) Such increase in equity capital and reserves necessary to meet the requirements of paragraphs 1(a) and 1(b) may be accomplished by the following:
   (i) The sale of equity securities;
   (ii) The collection of assets previously charged-off;
   (iii) The direct contribution of cash by the directors and/or the shareholders of the Bank;
   (iv) The reimbursement for income tax payments made to the holding company; or
   (v) Any other means acceptable to the Regional Director of the FDIC's * * * Regional Office ("Regional Director").
   (d) If all or part of the increase in total equity capital and reserves necessary to meet the requirements of paragraphs 1(a) and 1(b) is to be accomplished by the sale of new securities, the board of directors of the Bank shall forthwith take all steps necessary to adopt and implement a plan for the sale of such additional securities, including soliciting proxies and voting any shares or proxies owned or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation of the plan, and in any event, not less than twenty (20) days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC in Washington, D.C., for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination. If the increase in equity capital is provided by the sale of mandatorily convertible subordinated debentures and/or preferred stock, then all terms and conditions of the issue shall be presented to the Regional Director for prior approval.
   (e) In complying with the provisions of paragraph 1(d) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities written notice of any planned or existing development or other change which are materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph shall be furnished within ten (10) calendar days from the date any material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber who received or was tendered the information contained in the Bank's original offering materials.
   2. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall take all steps necessary to increase by at least two individuals the number of board of director members who are independent with respect to the Bank. This requirement may be accomplished through appointment or election at a special or general shareholders meeting, or in any other manner consistent with the Bank's bylaws {{4-1-90 p.A-811}}and the laws of the State of * * *. For purposes of this ORDER, a candidate who is independent with respect to the Bank shall be any individual (1) who is not an officer of the Bank or its affiliated bank, (2) who is not related by blood or marriage to an officer of the Bank or to any stockholder owning more than five (5) percent of the Bank's outstanding shares, and (3) who is not indebted to the Bank, directly, or indirectly (including the indebtedness of any entity in which the individual has a substantial financial interest) in an amount exceeding five (5) percent of the Bank's total equity capital and reserves.
   3. (a) As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend without the prior written consent of the Regional Director and the Commissioner.
   (b) As of the effective date of this ORDER, the Bank shall not make any payments to, or for the benefit of, * * * , the Bank's parent holding company, without the prior written consent of the Regional Director.
   4. Within thirty (30) days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" and one-half of those classified "Doubtful", as of May 23, 1984, that have not been previously collected or charged-off. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   5. (a) Within thirty (30) days from the effective date of this ORDER, the Bank shall replenish its loan valuation reserve by charges against or through its current operator expense account in an amount equal to these loans required to be charged-off under paragraph 4 of this ORDER.
   (b) Within thirty (30) days from the effective date of this ORDER, the Bank shall make an additional provision for loan losses which, after careful review and consideration by the board of directors, reflects the potential for further losses in the remaining loans classified "Substandard" and other loans in its portfolio. At a minimum, the loan valuation reserve shall be maintained at a level equal to two percent of the Bank's total loans.
   (c) Prior to submission or publication of all Reports of Condition and Income requested by the FDIC after the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's loan valuation reserve and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.
   6. (a) Within 180 days from the effective date of this ORDER, the Bank shall reduce loans and other real estate classified "Substandard" and the remaining loans classified "Doubtful" as of May 23, 1984, to not more than $2,000,000.
   (b) Within 360 days from the effective date of this ORDER, the Bank shall reduce the aforementioned loans and other real estate classified "Substandard" and remaining loans classified "Doubtful" to not more than $1,250,000.
   (c) Within 540 days from the effective date of this ORDER, the Bank shall reduce the aforementioned loans and other real estate classified "Substandard" and remaining loans classified "Doubtful" to not more than $750,000.
   (d) The requirements of subparagraphs (a), (b) and (c) above are not to be construed as standards for future operations and, in addition to the foregoing, the Bank shall eventually reduce all other adversely classified assets. For the purposes of subparagraphs (a), (b) and (c) above, the word "reduce" means (1) collect, (2) to charge- off, or (3) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification.
   (e) As of the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has a loan or other extension of credit with the Bank, which has been charged-off or classified, in whole or in part, "Loss" and is uncollected. The requirements of this subparagraph do not prohibit the Bank from renewing, upon collection of interest in cash from the borrower, any credit already extended to any borrower.
{{4-1-90 p.A-812}}
   7. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall review its lending policy for adequacy and implement written revisions thereto that are necessary to provide for safe and sound administration of all aspects of its lending function, including loan renewals and collections. The revised policy shall be submitted to the Regional Director for his review and comment.
   (b) As a minimum, revisions to the Bank's lending policy shall:
   (i) Require repayment schedules that are consistent with the purpose of the loan.
   (ii) Require that the source of repayment be specified.
   (iii) Provide guidelines for collateral margins.
   (iv) Require periodic evaluation of collateral values.
   (v) Require prior approval of the Bank's board of directors for capitalizing interest on renewal loans.
   (vi) Prohibit the capitalization of interest on loans of classified or financially troubled borrowers unless the additional funds advanced are adequately protected by collateral.
   (vii) Provide guidelines for placing loans on nonaccrual status that are consistent with instructions for preparation of FDIC Reports of Condition.
   (viii) Require that the direct and indirect obligations of the same or related interests shall not exceed 25 percent of total equity capital and reserves.
   8. The Bank shall reduce, in a manner consistent with sound banking practices, the level of its total loans to not more than 65 percent of its total deposits within 180 days from the effective date of this ORDER, and the Bank shall further reduce total loans to not more than 60 percent of total deposits within 360 days of the effective date of this ORDER.
   9. Within thirty (30) days from the effective date of this ORDER, the Bank shall take all steps necessary to eliminate and/or correct all violations of laws and regulations noted on page 6-a of the Report of Examination of May 23, 1984. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.
   10. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER (1) in conjunction with the Bank's next shareholder communication and also (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement or notice shall be sent to the FDIC at Washington, D.C., for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   11. On the last day of the second month following the date of issuance of this ORDER, and on the last day of every month thereafter, the Bank shall furnish written progress reports to the Regional Director detailing the form and manner of any action taken to secure compliance with the ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making further reports.
   12. This ORDER shall become effective ten (10) 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.
   Pursuant to delegated authority.
   Dated: November 6, 1985
   /s/ Angelo G. Nicchitta
   Administrative Law Judge

CERTIFICATE OF SERVICE
   I hereby certify that on November 6, 1985, a copy of the foregoing was mailed, {{4-1-90 p.A-813}}postage prepaid, to Hoyle Robinson, Executive Secretary, Federal Deposit Insurance Corporation, 550 - 17th Street, N.W., Room 6108, Washington D.C. 20429; * * * , Esquire, Federal Deposit Insurance Corporation, Legal Division, * * * and * * *
   /s/ Angelo G. Nicchitta
Administrative Law Judge

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Last Updated 6/6/2003 legal@fdic.gov