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FDIC Enforcement Decisions and Orders

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[5,114] Docket No. FDIC-87-65b, FDIC-87-66b, and FDIC-87-69b (Consolidated) (5-24-88).

   Banks ordered to cease and desist from practices such as operating with excessive volume of adversely classified assets; engaging in hazardous lending and lax collection practices; operating with inadequate equity capital and allowance for loan and lease losses; engaging in violations of applicable law; operating with deficient or inadequate loan documentation; engaging in practices which produce inadequate operating income and excessive loan losses; and failing to provide adequate supervision and direction over the affairs of the Banks to {{4-1-90 p.A-1257}}prevent unsafe or unsound practices and violations of law. (Petition seeking attorneys' fees under Equal Access to Justice Act denied, 8-21-89. See [¶5134]. The Order to Cease and Desist in this case was set aside and the matter was remanded by the U.S. Court of Appeals for the Eighth Circuit, 878 F.2d 215 (1989)).

   [.1] Cease and Desist Orders—Withdrawal of Answer
   By withdrawing answers to the Notice of Charges and of Hearing, Banks chose not to contest the serious allegations set forth therein. As a result, FDIC accepts such allegations as fact and incorporates them by reference.

   [.2] Cease and Desist Orders—FDIC Authority to Issue
   FDIC has broad discretion to impose affirmative as well as prohibitive relief to remedy unsafe or unsound practices or violations of law. The appropriateness of a remedy depends upon the specific circumstances of each case. A remedy selected by an agency is appropriate where the specific circumstances of the case show that it bears some rational relationship to the improper practices found to exist and is in such form as to correct existing problems or to prevent future abususe.

   [.3] Cease and Desist Orders—Affirmative Remedies—FDIC Approval of Management
   FDIC has a wide range of enforcement authority to take appropriate corrective action, including fashioning a Management Acceptable Clause in a Cease and Desist Order to facilitate the correction of Bank's management deficiencies. The appropriate remedial measure depends on specific factual circumstances.

   [.4] Directors—Duties and Responsibilities—Supervision of Bank's Affairs
   The existence of a qualified Senior Lending Officer does not absolve Bank's Board of Directors from a continuing responsibility for overseeing the Bank's operations and practices, including lending practices, or the correction of regulatory problems and deficiencies.

   [.5] Cease and Desist Orders—Affirmative Remedies—Additional Directors Ordered
   A Board of Directors composed of a majority of directors independent of Bank's Management is a prerequisite to provide proper oversight of compliance with FDIC order and Bank's return to financial health.

   [.6] FDIC—Supervisory Functions of
   FDIC's oversight does not conflict with Bank's selection of its own lending officers, subject to the requirement that such officers have the necessary level of training and experience to correct Bank's deficiencies and to avoid future problems.

   [.7] FDIC—Supervisory Functions of
   In addition to its authority to remove directors and officers, FDIC has limited authority to correct Bank's serious financial problems by requiring that Bank retain qualified Senior Lending Officers. Selection and retention of such officers is not too vague to be enforced nor does it represent a capricious abuse of agency discretion.

   [.8] Practice and Procedure—Stipulations
   FDIC has firmly established its authority to issue cease and desist orders and to fashion other remedies to correct unsafe and unsound practices.

   [.9] Cease and Desist Orders—FDIC Authority—Future Misconduct
   FDIC has the discretion to curb existing practices as well as to deter future misconduct.

   [.10] Cease and Desist Orders—FDIC Authority—Oversight of Management
   FDIC's supervisory and enforcement responsibilities empower it to assess management, not appoint it, or remove it, or limit its areas of responsibilities.

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   [.11] Cease and Desist Orders—FDIC Authority—Unsafe or Unsound Practices.
   Orders to Cease and Desist not only curb existing unsafe or unsound practices, but also deter such practices in the future.

In the Matters of: * * * BANK * * *; * * * BANK * * *; and * * * BANK
,

(Insured State Nonmember Banks)
FDIC-87-66b
FDIC-87-65b
FDIC-87-69b

(Consolidated)

I. PROCEDURAL HISTORY

   This proceeding is a consolidation of three cease and desist actions brought by the Federal Deposit Insurance Corporation ("FDIC") against the * * * Bank * * *, an insured state nonmember bank, the * * * Bank * * *, an insured state nonmember bank, and the * * * Bank, * * *, an insured state nonmember bank (* * *, * * * and * * * are sometimes referred to collectively as the "Banks" or the "Respondents"), for engaging in unsafe or unsound banking practices and violations of law within the meaning of section 8(b) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(b).
   On April 8, 1987, the FDIC issued separate Notices of Charges and of Hearing against * * *, * * * and * * * ("Notice") pursuant to the provisions of section 8(b) of the FDI Act, 12 U.S.C. § 1818(b), and the FDIC's Rules of Practice and Procedures ("Rules"), 12 C.F.R. Part 308. Each Notice alleged that the respective Banks had engaged in unsafe or unsound banking practices and violations of law; that each Bank had been operated with management whose policies and practices were detrimental to the Bank and jeopardized the safety of the Bank's deposits; and that each Bank's board of directors had failed to provide adequate supervision and direction over the active officers of its respective Bank to prevent the alleged unsafe or unsound banking practices and violations of law. Additionally, the Notices set forth each Bank's entitlement to an administrative hearing under section 8(b) of the FDI Act, 12 U.S.C. § 1818(b), to determine whether cease and desist orders ("Orders") should be issued against the individual Banks.
   On May 4 and 6, 1987, the Banks filed their respective Answers to the Notices, generally denying the allegations of unsafe or unsound banking practices and violations of law contained in each Notice.
   On September 8-9, 21–22, 1987, a formal hearing in the case of In the Matter of * * * Bank * * * Docket No. FDIC-87-66b, was conducted in * * *, before the Administrative Law Judge William A. Gershuny (the "ALJ"). During the hearing on September 22, 1987, the ALJ granted the joint oral motion of the parties to consolidate In the Matter of * * * Bank * * *, Docket No. FDIC-87-65b, with the * * * case, on the basis of the affiliate relationship between the Banks, the existence of common counsel representing the Banks, and the involvement of common questions of law in the proceedings. On November 9, 1987, the ALJ ordered that In the Matter of * * * State * * *, Docket No. FDIC-87-69b, be consolidated with the * * * and * * * cases again on the basis of common counsel and common questions of law.
   Pursuant to stipulations by the parties ("Stipulations"), approved and adopted by the ALJ, the Banks withdrew their Answers to the Notices and agreed not to contest the allegations contained therein. Furthermore, the Banks consented to all provisions of the proposed FDIC orders, except for requirements that the Banks obtain and retain management acceptable to the Regional Director of FDIC's * * *—Regional Office ("Regional Director"), contained in paragraph 1(a) and the first nine words of paragraph 1(b) of each order ("Management Acceptable Provisions") and certain injunctive relief contained in paragraphs A-I of the * * * Order, paragraphs A-H of the * * * Order, and paragraphs A-H of the * * * Order ("Injunctive Relief Provisions").1


1 These provisions are identical in each order, except that the * * * order contains an additional subparagraph. They require the Banks to stop engaging in the following unsafe or unsound banking practices: (1) operating with excessive adversely classified assets; (2) certain specified hazardous lending and poor collection practices; (3) operating with inadequate capital and loan loss allowances; (4) operating with management whose policies are detrimental to the Banks; (5) inadequately documenting loans; (6) engaging in practices that produce inadequate income and excessive loan losses; (7) failing to provide adequate supervision and direction over the affairs of the Banks; and (8) operating (Continued) {{4-1-90 p.A-1259}}
   Subsequent to the hearings, joint stipulations, and briefing of the two remaining relief issues by the parties, the ALJ issued his Recommended Decision and Order on February 1, 1988. The ALJ found that the Respondent Banks had engaged in unsafe or unsound banking practices and incorporated by reference into the Recommended Decision as findings of fact and conclusions of law the allegations contained in the Notices. However, the ALJ did not recommend that the remedy for the violations include the Management Acceptable Provisions. Rather, the ALJ recommended alternative orders which did not include the Management Acceptable Provisions as proposed by FDIC enforcement counsel. Lastly, the ALJ adopted and incorporated into his decision the Injunctive Relief Provisions proposed by FDIC enforcement counsel. Both FDIC enforcement counsel and Respondents filed exceptions.2

II. STATEMENT OF THE CASE

   Pursuant to the Stipulations of the parties, which included withdrawal of the Banks' Answers, and by operation of section 308.06(d) of the Rules and Regulations, 12 C.F.R. § 308.06(d), the ALJ found the facts and conclusions in the case to be as alleged in the Notices. The Notices alleged, and the ALJ found and concluded, that each of the Respondent Banks is subject to the jurisdiction of the FDIC and its rules and regulations. (R.D. at 2).3 The Notices alleged, and the ALJ properly found and concluded, that each Respondent engaged in unsafe or unsound banking practices which include: following hazardous lending and lax collection practices; operating with an excessive volume of poor quality loans as a result of such hazardous lending and lax collection practices; operating with an inadequate level of capital protection for the kind and quality of assets held; failing to provide and maintain an adequate allowance for loan and lease losses for the volume, kind, and quality of loans and leases held; and operating in a manner which produces excessive overhead expenses, inadequate operating income or inadequate earnings. (R.D. at 2; Nov. 16 Br. at 15-17; Dec. 3 Br. at 8).
   Each Notice alleged, and the ALJ correctly found and concluded that the Banks' management "caused or permitted" the Banks to engage in such unsafe or unsound banking practices; that the Banks had been "operated with management whose policies are detrimental to [the Banks] and jeopardize the safety of [the Banks'] deposits;" and that the "boards of directors [of the Banks had] failed to provide supervision and direction over the active officers of [the Banks] to prevent" such practices. (R.D. at 2).

   [.1] By withdrawing their Answers to the Notices, Respondents have chosen not to contest the allegations contained in the Notices and those allegations must be found as fact as set forth in the Regulations. Consequently, Respondents presented no evidence to rebut or to mitigate the seriousness of the allegations. Therefore, the Board of Directors ("Board") of the FDIC has no alternative but to accept the serious allegations set forth in the Notices as fact and to incorporate such findings herein by reference.
   Each Respondent has agreed to the entry of all relief provisions of the proposed Order in its respective case except for the Management Acceptable Provisions and the Injunctive Relief Provisions. Accordingly, all agreed-upon provisions of the proposed Orders except a provision requiring the selection of independent boards of directors, are adopted and are included in the Board's cease and desist orders in this proceeding. The clause requiring the selection of independent boards of directors is adopted, in an amended form, in the final Orders.


1 Continued: with an inadequate loan loss reserve for the volume, type and quality of the Bank's assets. * * * is also ordered to stop a violation of law.
2 By letter dated February 29, 1988, Respondents requested, pursuant to 12 C.F.R. § 308.17, that the Board hear oral argument from counsel in this matter. Under section 308.17, oral argument is purely discretionary and is only granted in those rare cases where the Board determines that such argument will aid in the decision process and will be in the best interests of justice. In this matter, counsel for Respondents requests argument as to legal issues which have been the subject of extensive briefing by parties. Under these circumstances, the Board deems argument to be unnecessary and of no assistance in deciding the legal issues presented in this proceeding.

3 Citation to the ALJ's Findings of Fact and Conclusions of Law and Recommended Decision shall be noted "R.D. at ____". Citation to Respondents' December 17, 1987 Brief shall be noted "Resp. Br. at ____." Citation to FDIC enforcement counsel's briefs of November 16, 1987 and December 3, 1987, respectively shall be noted "Nov. 16 Br. at ____," and "Dec. 3 Br. at ____."
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III. THE RELIEF ISSUES

   The parties have left at issue two fundamental aspects of the relief sought by enforcement counsel. The parties have sought to present and to attack, respectively, these remedies as matters of law. The first issue relates to whether the FDIC has the authority under section 8(b) of the FDI Act to take affirmative action as a remedial measure to correct deficiencies in bank management that have led to serious unsafe or unsound banking practices resulting in severe financial problems for the bank. In these proceedings, the form of the FDIC's proposed affirmative remedial action was to require that within 90 days the Banks must have and thereafter retain "management acceptable to the Regional Director...." The provision at issue also required the Banks to have and retain a qualified senior lending officer with written authority from the Banks' boards and also set out four factors that are to be the basis for management's acceptability.
   The second issue relates to the propriety of certain injunctive relief which is summarized herein at note 1, page 3, and which Respondents challenged as overbroad and too vague to be complied with by the Banks or enforced by the FDIC.4

A. The ALJ's Recommended Remedies

   In the Recommended Decision, the ALJ found that the Management Acceptable Provisions proposed by enforcement counsel5 should not be included in the Orders, but that the Injunctive Relief Provisions should be included as part of his recommended order. (R.D. at 6).
   The ALJ concluded that the proposed Management Acceptable Provisions are not an appropriate remedy under section 8(b) of the FDI Act for four reasons. First, the ALJ interpreted the "plain meaning" of the word "acceptable," to mean that the Regional Director and the Commissioner of Commerce of the State of * * * ("Commissioner") would have the authority to remove officers and directors. This plain meaning interpretation, the ALJ concluded, "conflicts" with the Proposed Management Acceptable Provisions since section 8(b) of the FDI Act does not expressly authorize "removal" of an officer or director by the FDIC, and the FDIC staff does not seek to assert any such authority. (R.D. at 3-5).
   Second, the ALJ found that the Management Acceptable Provisions conflicted with a "fundamental precept of bank law"—that it is a bank's responsibility to initially determine its own management, unless specific powers, such as that to remove directors or officers under section 8(e), have been delegated to the FDIC. Because the ALJ concluded the Management Acceptable Provisions are tantamount to removal power, he also concluded that such a provision in a section 8(b) cease and desist order would usurp a bank's responsibility to determine its own management. (R.D. at 6).
   Third, the ALJ concluded that "it is manifestly improper to delegate, under an FDIC order, enforcement authority to the state." Providing the Commissioner with the authority to determine acceptability of management in these Banks, concluded the ALJ, would be such an improper delegation of such authority.6 (R.D. at 6).


4 By letter dated February 29, 1988, Respondents objected to any consideration of an alternative cease and desist order proposed by the FDIC as part of its Exception to the ALJ's Recommended Decision and Order. We agree that under the circumstances of this proceeding, it would be inappropriate to consider this proposal to which Respondents had no opportunity to respond at the hearing. Consequently, the Board has not and will not give any consideration to any such tardy proposal. This does not mean, however, that the Board cannot fashion sua sponte a remedy other than those proposed by the parties or the ALJ.
5 The Management Acceptable Provision contained as paragraph 1(a) of the proposed orders reads as follows:
   1(a) No more than 90 days from the effective date of this ORDER, the Bank shall have, and thereafter continue to retain, management acceptable to the Regional Director of the FDIC's * * * Regional Office ("Regional Director") and the Commissioner of Commerce for the State of * * * ("Commissioner"). Such management shall include a qualified senior lending officer who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining lending policies in accord with sound banking practices. The acceptability of management shall be assessed on its ability to: (i) comply with the requirements of this ORDER, (ii) operate the Bank in a safe and sound manner, (iii) comply with applicable laws and regulations, and (iv) maintain all aspects of the Bank in a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness and liquidity. As used herein, "maintain" includes improvement in quality if necessary to comply with this requirement.
   In addition, Respondents have objected to the first nine words of paragraph 1(b) of the proposed orders which contain the following phrase "[In] order to provide acceptable management for the Bank...." The remainder of provision 1(b), which was consented to by the Respondents, requires the Banks' boards of directors to develop a management plan.


6 The particular requirement objected to by the ALJ provided that the Banks' management be acceptable to the Commissioner for the State of * * *. The ALJ found this to be an improper delegation of FDIC enforcement (Continued)

{{4-1-90 p.A-1261}}Fourth, the ALJ found the Proposed Management Acceptable Provisions to be so vague as to raise serious questions as to the Banks' ability to comply and the FDIC's ability to enforce such provisions. (R.D. at 6-7).
   Nevertheless, the ALJ concluded that in this proceeding the orders should address the deficiencies attributable to the Banks' management in light of the serious findings made against them. He therefore recommended a more narrowly focused provision and deleted any requirement for acceptability by the Regional Director.7
   Finally, in recommending the incorporation of the Injunctive Relief Provisions proposed by FDIC enforcement counsel, the ALJ concluded that such remedy was appropriate because the language fairly tracked the broad allegations contained in the Notices, and was essential to both curb existing practices and serve as a deterrent against future similar unsafe or unsound banking practices. (R.D. at 7).

B. Discussion of the Remedies

   [.2] 1. The FDIC's Authority to Fashion
Appropriate Remedies

   Section 8(b) of the FDI Act, 12 U.S.C. § 1818(b), specifically provides that the Board has the authority to impose affirmative as well as prohibitive relief. In appropriate circumstances, the Board has exercised just this authority and utilized its judgment and expertise to formulate orders that are both remedial in nature and specifically designed to correct the problems of a particular bank. The Board further notes that judicial deference has been afforded to the experience and expertise of federal regulatory agencies in the formulation of remedies necessary to carry out their statutory mission. See, e.g., Groos National Bank v. Comptroller of the Currency, 573 F.2d 889 (5th Cir. 1978). In regulating financial institutions, where it is found that a bank has engaged in unsafe or unsound practices or violations of the law, the courts have held that the appropriate federal regulatory agency has broad discretion under the FDI Act to fashion an appropriate remedy to stop such practices or violations, to correct the effects of such practices or violations, and to prevent future abuses. Brickner v. Federal Deposit Insurance Corp., 747 F. 2d 1198, 1203 (8th Cir. 1984); 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); Scotia v. United States of America, 530 F. Supp. 162, 165 n.1 (citing The First National Bank of Scotia v. United States of America, unpublished opinion No. 80-4256, slip op. at 2 (2d Cir. April 9, 1981)), 166 (D.D.C. 1982); Groos, 573 F.2d at 897.8
   The appropriateness of a chosen remedy depends upon the specific circumstances of each case. A remedy selected by an agency is appropriate where the specific circumstances of the case show that it bears some rational relationship to the improper practices found to exist and is in such form as to correct existing problems or to prevent future abuses. As stated by the Supreme Court "...Courts will not interfere [with an order fashioned by an agency] except where the remedy selected has no reasonable relation to the unlawful practices found to exist." Jacob Siegel Co. v. Federal Trade Commission, 327 U.S. 608, 613 (1946). See FTC v. Ruberoid, 343 U.S. 470, 473 (1951); National Labor Relations Board


6 Continued: authority to the State. FDIC enforcement counsel, in its Brief in Support of its Exceptions to the Recommended Decision of the Administrative Law Judge, admitted this issue to be "problematic," and suggested that any reference to the State Commissioner be deleted from paragraph 1(a) of the final Orders. The Board agrees that such a requirement is improper in a federal supervisory order. See FDIC-83-252 b&c, FDIC-84-49b, FDIC-84-50e, Vol I P-H FDIC Enf. Dec. ¶5049 at 6208 (1985). This does not mean, however, that the FDIC is prohibited from seeking the views of state authorities as to supervisory matters.

7 The ALJ proposed the following provision as an alternative to enforcement counsel's Management Acceptable Provision:
1(a). No more than 30 days from the effective date of this ORDER, the Bank shall designate a qualified chief lending officer who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining lending policies in accord with sound banking practices. The Bank shall promptly notify the Regional Director and the State Commissioner of the identity of said chief lending officer, and shall submit to them a copy of his written authority.
R.D. at 7–8.


8 Although the Groos and Scotia cases involved only the Office of the Comptroller of the Currency ("OCC"), they are apposite because the cease and desist powers of the OCC and the FDIC are the same and are governed by the same statute. See 12 U.S.C. §§ 1813(q) and 1818(b).

{{4-1-90 p.A-1262}} v. Express Pub. Co., 312 U.S. 426, 437 (1941).

   [.3] A cease and desist order, such as the one at issue here, is a mechanism by which the FDIC is able to require a bank to take the actions necessary to correct the conditions resulting from violations of law or unsafe or unsound banking practices. A simple prohibitory requirement that a bank halt the unsafe or unsound practices is frequently an insufficient remedy to restore the bank to financial health. For this reason, section 8(b) specifically authorizes affirmative relief to correct the existing problems. Where a bank's management, through its actions, inactions or policies, is a key factor in the creation of the bank's problems, often the most effective (and many times the only) way to restore the bank to financial health is to require it to upgrade the level of ability of its management. The Board has held that, in appropriate circumstances, it has the broad discretion to fashion an appropriate remedy, such as a management acceptable clause, to facilitate correction of the Bank's problems, including management deficiencies, and to bring to an end the unsafe or unsound conditions or practices. Docket No. FDIC 85-42b, Vol II P-H Enf. Dec. ¶5062, 6588 (1986).
   The quality of management is perhaps "the single most important element in the safe and sound operation of a bank." (R.D. at 3); FDIC Manual of Examination Policies, Section L, pp. 1, 8. Congress recognized the importance of management to the overall health of a bank by mandating in the FDI Act that, in the exercise of many of its supervisory responsibilities, the FDIC should assess and approve of the bank management's character, ability and performance. See, e.g., 12 U.S.C. §§ 1815(b)(4), 1816, 1817(j)(7)(D), 1828(c)(5); see also FDIC Statements of Policy, FDIC Loose Leaf Reports, Vol. 1, pp. 5053-56, 5085-90, 5105-09.
   Under section 8 of the FDI Act, the FDIC has been granted a wide range of enforcement authority to take appropriate corrective action and fashion remedies where necessary to carry out its Congressional mandate. See 12 U.S.C. § 1818(a)-(g), (i), (j), (o), (p), (r). Where it has been established that the unsafe or unsound condition of a bank was due to either the actions or the inactions of its management, this Board has not been hesitant to order affirmative remedies limiting the authority of specific officers or directors and a requirement that a bank permit the FDIC to review the suitability of senior management. Docket Nos. FDIC 85-42b, Vol II P-H FDIC Enf. Dec. ¶5062 (1986); FDIC 83-132b, Vol I P-H FDIC Enf. Dec. ¶ 5024 (1985), aff'd as to other issues, First State Bank of Wayne County v. FDIC, 770 F.2d 81 (6th Cir. 1985); FDIC 83-172b, Vol I P-H FDIC Enf. Dec. ¶5030 (1984), aff'd, Bank of Dixie v. FDIC, 766 F.2d 175 (5th Cir. 1985).

   2. The Management Acceptable Provisions at Issue

   While the Board has rejected the arguments of the Respondents and the ALJ that the FDIC lacks the legal authority to impose affirmative relief dealing with management, this type of relief has been ordered by the Board only in very serious situations. Whether a management acceptable provision of some type is an appropriate remedial measure is dependent upon the specific factual circumstances of a particular proceeding and is a separate factual issue that must be addressed in each matter. In this proceeding, the Board is forced to make such a determination as to the appropriateness of such a management acceptable provision on the basis of a very sparse and conclusory factual record. Even though the record is sparse, it establishes serious deficiencies in lending operations, management and controls, all of which are of great concern to this Board. The lack of a more complete factual record exploring in some detail the relationship between the Banks' unsafe or unsound practices and poor financial condition and the Banks' senior management has increased the difficulty of making a proper analysis and an informed judgment as to the appropriate remedial measures for these particular Banks. Nevertheless, in view of the serious financial problems and urgent need for corrective action by these Banks the Board concludes that any further delay in implementing appropriate corrective action is untenable and has exercised its best judgment on the basis of the facts available and the conclusions that are implicit from those facts.
   In the present cases, a requirement that management be acceptable to the Regional Director does not seem appropriate as a remedial measure based upon this factual record. However, the Board concludes that some form of affirmative relief addressing the management of the Banks' lending operations is an appropriate remedy given the {{4-1-90 p.A-1263}}number and the nature of the unsafe or unsound practices and conditions at the Banks. Based upon the uncontested facts, it is apparent that it is the Banks' lending functions that have given rise to these proceedings. The uncontested facts, as to which Respondents chose not to provide the Board with any explanatory or mitigating evidence, paint a picture of banks that are in very serious financial difficulty due to imprudent lending and poor collection practices. Specifically, * * *'s adversely classified assets totalled $882,000 which amounted to 172.94 percent of its total equity capital and reserves. Of that amount, $859,000 were adversely classified loans. Similarly, * * *'s adversely classified assets totalled $1,153,000 which equaled 184.19 percent of total equity capital and reserves. Of that amount, $1,067,000 were adversely classified loans. Finally, * * *'s classified loans, which totalled $1,631,000, were equal to 172.4 percent of the Bank's total equity capital and reserves. The Respondents have offered no explanation of the causes of the Banks' serious financial problems and offered no evidence that would tend to mitigate the responsibility of management for these problems.
   The record shows the root causes of the serious financial conditions of the Banks are related to their lending and collection practices. These practices include extending credit without established repayment plans or specific methods of repayment, extending credit with insufficient collateral protection, extending credit without adequate loan documentation, purchasing loan participations from affiliated banks without conducting independent credit analyses of the loans, and failing to develop loan work out plans for problem assets. On the basis of the record as it stands, the Board can only conclude that the responsibility for the Banks' serious financial problems rests with the action or failures of the Banks' current management. Therefore, the Board concludes, as did the ALJ, that it is both necessary and appropriate that the remedial orders here must address the deficient management of the Banks' lending operations if those orders are to achieve their intended purposes—the correction of the Banks' weakened financial condition and their return to financial health.

   [.4] As the ALJ recognized, at a minimum it is vital that the Banks each have and retain a qualified senior lending officer with a suitable degree of experience in not only approving future loans, but also in collecting the substantial volumes of adversely classified and delinquent loans already in the Banks. The Board agrees. Further, if a lending officer is to be successful, it is also necessary that his/her responsibilities and authority be set out in writing and that the officer adhere to safe and sound lending practices and policies. However, the existence of a qualified lending officer does not absolve the Banks' boards of directors and other management from their continuing responsibility for overseeing the Banks' future operations and practices, including their lending practices or the correction of the present problems and deficiencies. The Banks' directors must initially select with due care a qualified individual to serve as the senior lending officer and provide that officer with an appropriate level of authority to successfully perform the duties of that position. The directors then must provide adequate oversight over the performance of the senior lending officer to ensure that the requirements of the cease and desist order are met and that the lending operations continue to meet safety and soundness standards.
   The facts and legal conclusions in the case at bar, which are uncontested, establish that Respondents' lending and collection practices are the primary cause of the Banks' problems. Although there are many other unsafe or unsound practices which are undisputed in this case, such as operating with inadequate levels of capital protection for the kind and quality of assets held, failure to provide and maintain adequate allowances for loan and lease losses, and operating in a manner which produces inadequate income and reductions in equity capital which are a result of generally poor management, the Board concludes on the basis of the record here that they are directly or consequentially the result of the unsafe or unsound lending and collection practices. Other remedial provisions in the cease and desist orders are designed to correct these practices. However, the selection and retention of a qualified senior lending officer is critical to the correction of all of the unsafe or unsound practices and must be included {{4-1-90 p.A-1264}}as a requirement of the cease and desist orders.

   [.5] Moreover, the record establishes in the present case that the Banks' boards of directors have failed to provide supervision over the active officers to prevent such practices. The oversight and guidance of a board of directors is critical to the effective management and operation of a bank. The Board believes that an independent board of directors is a prerequisite to correct the lack of supervision of the Banks' management. The Respondents have stipulated to a provision in the proposed Orders requiring that the Banks' boards of directors be composed of a majority of independent directors. Based upon the serious financial condition of the Banks and the management deficiencies discussed herein, the Board agrees that the Banks must each have an independent board of directors to provide proper oversight of compliance with the remedial Order and the Banks' return to financial health. However, the stipulated provision leaves indefinite the time for implementation of the requirement for an independent board of directors. The Board finds such ambiguity unacceptable in view of the Banks' serious financial problems and it's managerial weaknesses. Consequently, the Board accelerates the time period for selection of an independent board of directors to require an election within 60 days of the effective date of the Orders and rejects the stipulated provisions.
   The boards of directors and management of the Banks have apparently been unable or unwilling to control or correct the existing unsafe or unsound lending and collection practices. While there are specific requirements set as part of these cease and desist orders, the ultimate ability of the Banks to return to a condition of safety and soundness will in large part be the result of firm oversight by independent boards of directors and the competence and ability of their senior lending officers. The fiscal results achieved by the current management and directors have demonstrated their ineffectiveness in supervising the lending functions of the Banks. Therefore, the Board is of the opinion that the election of independent boards of directors and the selection of qualified lending officers are both necessary and related to the correction of the existing unsafe or unsound practices and conditions at the Banks.
   On the basis of the record in this proceeding and for the reasons discussed above, the Board concludes that these Banks' financial weaknesses can best be corrected, the unsafe or unsound practices halted, and future lending abuses prevented by a requirement that the Banks' have and retain a qualified senior lending officer. In addition, that officer must be given appropriate written authority to deal with the lending functions of the Banks. The Banks shall also notify the Regional Director of any replacement of the senior lending officer so long as the cease and desist order remains in effect. The form of the particular provision shall be as follows:

       No more than 30 days from the effective date of this ORDER, the Bank shall have and thereafter retain a qualified chief lending officer who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining lending policies in accord with sound banking practices. Such senior lending officer shall have an appropriate level of lending, collection and loan supervision experience for the type and quality of the Bank's loans. The Bank shall promptly notify the Regional Director of the FDIC's * * * Regional Office ("Regional Director") of the identity of said senior lending officer, and during the effective term of this ORDER any replacement for such officer, and shall submit to him a statement of his/her qualifications and a copy of his/her written authority.
   This requirement, together with the requirement that the Banks shall have boards of directors composed of a majority of independent directors, is in the Board's view sufficient to accomplish the necessary corrective actions. On the basis of this record, the Board sees no need for a broader management provision.

   [.6] In his Recommended Decision, the ALJ noted that it is a "fundamental precept of bank law [that] it is the responsibility of the bank, in the first instance, to determine its own management." (R.D. at 6). While the Board agrees with this statement, it is our view that some oversight by the FDIC over management of the Banks does not conflict with this proposition. The Banks will still select their own lending officer(s) subject only to the requirement that the selected officers have the necessary level of training and experience to correct the
{{4-1-90 p.A-1265}}Banks' deficiencies and to avoid future experience to correct the Banks' deficiencies and to avoid future problems of a similar nature. Similarly, the ALJ was concerned about the vagueness of the Management Acceptable Provision proposed by enforcement counsel. While the Board does not agree with the concern expressed by the ALJ in this regard, it is not necessary to address that concern since we have adopted a provision which is more specific.

   3. Respondents' Objection to the Management Clause

   Throughout these proceedings it has been asserted by Respondents both explicitly and implicitly that the provisions which require that management be acceptable to the FDIC are in fact the exercise of removal power under section 8(b), which sidesteps the stringent requirements for removal set forth under section 8(e). 12 U.S.C. ¶1818(e). (Resp. B. at 6-13, 24-25; R.D. at 6). The Board has consistently concluded that the inclusion of a management or lending officer acceptable clause is a proper exercise of FDIC enforcement authority under section 8(b). See, e.g., Docket Nos. FDIC 85-42b, 2 P-H FDIC Enf. Dec. ¶5062 (1986); FDIC 83-132b, 1 P-H FDIC Enf. Dec. ¶5024 (1985), aff'd as to other issues, First State Bank of Wayne County v. FDIC, 770 F.2d 81 (6th Cir. 1985); FDIC 83-172b, 1 P-H FDIC Enf. Dec. ¶5030 (1984), aff'd, Bank of Dixie v. FDIC, 766 F.2d 175 (5th Cir. 1985).

   [.7] This Board disagrees with the premise that affirmative remedial provisions, such as management limitations on the authority of specific officers or the requirement of qualified officers acceptable to the FDIC, are tantamount to a section 8(e) removal. The effect of such restrictions is much more limited than that imposed under section 8(e). In a removal under section 8(e), an officer or director is prohibited from participating in any manner in the conduct of the affairs of the bank from which he/she has been removed and from participating in any manner in the conduct of the affairs of any other FDIC insured bank. 12 U.S.C. ¶1818(e)(1), (j)(2). As such, a section 8(e) removal would not only eliminate the current officers' lending authority, but would also remove them from all management responsibilities within the Banks and prevent them from assuming or acting in any management positions in other FDIC insured banks.
   The remedial management provisions only have limited effects, e.g., limiting the authority of an officer at a particular bank or in some instances requiring that such officer assume new duties and responsibilities in another area of a bank. The provision the Board imposes here only requires that the Banks have and retain qualified senior lending officers. The provision does not directly affect any other employee of the Bank. Thus, even if the Banks have a lending officer at present (which is indeterminable on the basis of this record), only that person's lending authority could potentially be affected, not his continued participation in non-lending management activities or even lending activities under the supervision of the senior lending officer. Therefore, the Respondents and the ALJ were incorrect in equating remedies such as a management acceptable provision with that afforded under section 8(e) of the FDI Act.
   Finally, the Board concludes that the adopted provision requiring the selection and retention of a qualified senior lending officer is not too vague to be enforced, nor does it represent a capricious abuse of agency discretion. The Board finds the qualified lending officer provision to be specifically tailored to correct the serious financial problems of the Banks that are directly related to their lending practices.

   B. The Injunctive Relief Provisions

   The Banks have not consented to the Injunctive Relief Provisions contained in paragraphs A-I of the * * * Order, paragraphs A-H of the * * * Order and paragraphs A-H of the * * * Order. The injunctive relief provisions order the Banks to cease and desist from specified unsafe and unsound banking practices. These are: operating with an excessive volume of adversely classified loans; engaging in hazardous lending and lax collection practices; operating with inadequate equity capital and loan loss allowances; operating with management whose policies are detrimental to the Banks; operating with deficient or inadequate loan documentation; engaging in practices which produce inadequate income; failing to provide adequate supervision and direction over the Bank; and oper- {{4-1-90 p.A-1266}}ating with inadequate allowances for loan and lease losses.

   [.8] As discussed, the FDIC has broad discretion in formulating remedies under section 8(b). Specifically, section 8(b) provides in pertinent part that "...[t]he agency may issue and serve upon the bank. ...an order to cease and desist from any such violation or [unsafe or unsound] practice. Such order may...require the bank... to cease and desist from the same."
   Respondents have in essence admitted numerous unsafe or unsound banking practices and violations of law. These include (1) improper lending and collection practices, including extending credit without established repayment plans or specific methods of repayment, and extending credit without sufficient collateral protection; (2) excessive volumes of poor quality loans in relation to, among other things, total equity capital and reserves; (3) inadequate capital protection for the assets held; (4) failure to provide and maintain adequate allowances for loan and lease losses; and (5) operating so as to produce inadequate income. The stipulated facts also establish that these and other improper practices are largely attributable to the boards of directors' failure to provide adequate supervision and direction over the active officers and employees of the Banks and to the boards' inadequate or imprudent policies and practices.

   [.9] The type of injunctive provisions at issue in this action are routinely found in FDIC cease and desist orders and have been imposed on literally hundreds of banks which have made no serious complaints about being able to understand and comply with them. That Respondents have created a tempest in a teapot with respect to this issue, seems clear. The ALJ also considered the objections and concluded that the injunctive relief was closely related to the unsafe or unsound practices to which Respondents have in essence admitted. The Board concurs with the analysis by the ALJ in this respect. The Board finds that the proposed injunctive relief provisions clearly fall within the FDIC's broad discretion to fashion appropriate remedies to stop such practices and to prevent future abuses. Moreover, the language of the proposed injunctive relief provisions is not vague or overbroad but fairly tracks the allegations of unsafe or unsound banking practices and violations of law that the Banks chose not to contest. Consequently, the proposed provisions are not only aimed at curbing existing practices as alleged, but also at deterring such future misconduct. As stated by the United States Supreme Court, an agency has the discretion not only to formulate orders to stop existing practices but also to, "effectively close all roads to the prohibited goal, so that its order may not be by-passed with impunity." FTC v. Ruberoid, 343 U.S. at 473.

IV. CONCLUSION

   Therefore, for the reasons set forth herein, the Board adopts the ALJ's findings of fact in their entirety and the conclusions of law except those relating to the so-called Management Acceptable Provision and the independent board of directors provision. The Board's analysis, findings and conclusions with regard to those clauses are set forth herein. Consequently, the Board adopts and includes as the appropriate remedy the requirements set forth as paragraphs 1(a) and 1(d) and the injunctive relief provisions of the Orders accompanying this Decision.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 24th day of May, 1988.

Hoyle L. Robinson
Executive Secretary

In the Matter of * * * BANK

(Insured State Nonmember Bank)

ORDER TO CEASE AND DESIST

   Having found that * * * Bank * * * ("Bank"), has engaged in unsafe or unsound banking practices and a violation of law within the meaning of section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. ¶1818(b), and for the reasons set forth in the separate Decision of the Board of Directors of the Federal Deposit Insurance Corporation:
   IT IS HEREBY ORDERED, that the 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 and unsound banking practices and violations of law:
   A. operating with an excessive volume of adversely classified assets;
   B. engaging in hazardous lending and lax collection practices, including maintaining
{{4-1-90 p.A-1267}}an excessive volume of adversely classified loans;
   C. operating with inadequate equity capital and allowance for loan and lease losses for the kind and quality of assets held;
   D. engaging in violations of applicable law;
   E. operating with management whose policies and practices are detrimental to the Bank;
   F. engaging in practices which produce inadequate operating income and excessive loan losses;
   G. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violation of law; and
   H. operating with an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans held.
   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) No more than 30 days from the effective date of this ORDER, the Bank shall have and thereafter retain a qualified chief lending officer who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining lending policies in accord with sound banking practices. Such senior lending officer shall have an appropriate level of lending, collection and loan supervision experience for the type and quality of the Bank's loans. The Bank shall promptly notify the Regional Director of the FDIC's * * * Regional Office ("Regional Director") of the identity of said senior lending officer, and during the effective term of this ORDER any replacement for such officer, and shall submit to him a statement of his/her qualifications and a copy of his/her written authority.
   (b) The board of directors shall, within 30 days from the effective date of this ORDER, develop a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:

       (i) identification of both the type and number of officer positions needed to manage and supervise the affairs of the Bank;
       (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
       (iii) evaluation of each Bank officer, and in particular the senior lending officer, and staff members to determine whether these individuals possess the ability, experience, and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and
       (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience, and other qualifications, which the board of directors determines are necessary to fill Bank officer or staff member positions consistent with the board's analysis, evaluation, and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
   (c) The written management plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for the State of * * * ("Commissioner") for review and comment. Within 30 days from the receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall approve the written management plan which approval shall be recorded in the minutes of the board of directors. Therefore, the Bank, its directors, officers, and employees shall implement and follow the written management plan and/or any subsequent modification.
       (d)(i) Within 60 days from the effective date of this ORDER, the Bank shall convene a meeting of its shareholders. At that meeting and at each succeeding meeting of the shareholders at which Bank directors are to be elected, the Bank shall nominate as candidates for election to the board of directors such number of individuals independent with respect to the Bank as are necessary to cause a majority of the board of directors to be and to remain independent with respect to the Bank.
    {{4-1-90 p.A-1268}}
       (ii) For purposes of this ORDER, an individual who is "independent with respect to the Bank" shall be any individual (1) who is not an officer of the Bank or its parent holding company, * * * , and who does not own more than five (5) percent of the outstanding shares of the Bank or of * * * , (2) who is not related by blood, marriage, or common financial interest to an officer of the Bank or * * * 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 indebtness of any entity in which the individual has a substantial financial interest), in an amount exceeding $70,000.
   2. No more than 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss" as of April 23, 1986, which have not been previously collected, charged-off, or otherwise eliminated by other proper entries. Reduction of these assets through the use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph.
   3. (a) No more than 90 days from the effective date of this ORDER, the Bank shall increase its equity capital by not less than $100,000 over the level existing as of April 23, 1986. Such increase in capital may be accomplished by:
       (i) the sale of common stock; or
       (ii) the direct contribution of cash by the shareholders and/or directors of the Bank; or
       (iii) the reduction of all or part of assets classified "Loss" as of April 23, 1986, without loss or liability to the Bank. Reductions to loans and leases classified "Loss" shall first be credited to the Bank's allowance for loan and lease losses (hereafter "allowance") and, if the board of directors' review of the adequacy of the allowance required by paragraph 4 of this ORDER indicates that such allowance has a balance in excess of that required for adequacy, any such excess may be transferred to equity capital through a negative Provision for loan and lease losses; or
       (iv) the collection in cash of assets previously charged off; or
       (v) the retention of earnings; or
       (vi) any combination of the above means; or
       (vii) any other means acceptable to the Regional Director.
   (b) As used in paragraph 3(a)(iii) of this ORDER, "reduction" means to (1) collect or (2) improve the quality of the assets adversely classified to warrant removal of any "Loss" or "Doubtful" classification by the FDIC.
   (c) If all or part of the increase in total equity capital required by the Bank under paragraph 3(a) of this ORDER involves a 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 of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the sale of the securities, 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, Registration and Disclosure Unit, Washington, D.C. 20429, for review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (d) In complying with the provisions of paragraph 3(c) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank stock, written notice of any planned or existing development or other change which is 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 3(d) shall be furnished within ten (10) calendar days from the date such material development or change was planned or occurred, whichever is earlier, to every purchaser and/or subscriber of Bank stock who received or was tendered the information contained in the Bank's original offering materials.
    (e)(i) No more than 90 days from the effective date of this ORDER, the Bank shall have equity capital, exclusive of the allowance for loan and lease losses, at or in excess of 6 percent of the Bank's average total assets for the applicable month under calculation and shall continue to {{4-1-90 p.A-1269}}maintain its equity capital at or in excess of such level as calculated herein while this ORDER is in effect.
       (ii) For the purposes of paragraph 3(e)(i) of this ORDER, the term "applicable month under calculation" shall be each June and December, beginning with December 1987; the ratio shall be calculated as of the last day of each month; "equity capital," "the allowance for loan and lease losses," and "total assets" shall have the same meaning as those terms have in the prevailing Instructions for Preparation of Reports of Condition; and "average total assets" shall be the average of the sum of the Bank's daily total assets for the month under calculation.
   (f) If during the period this ORDER is in effect the ratio specified in paragraph 3(e)(i) declines below six percent, the Bank, within 30 days after the date on which the said ratio so declined, shall submit a written plan to the Regional Director and the Commissioner for increasing the ratio up to or in excess of six percent within 60 days after the written plan is implemented. Upon approval by the Regional Director and Commissioner, the Bank shall immediately implement the written plan.
   (g) A written record of all actions taken by the Bank to comply with the capital requirements of paragraphs 3(a) through 3(f) of this ORDER shall be maintained in the minutes of the board of directors.
   (h) Nothing in this ORDER shall operate to subject any individual director of the Bank to a Federal district court order of enforcement pursuant to section 8(i)(1) of the Act, 12 U.S.C. § 1818(i)(1), or imposition of civil money penalties pursuant to section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2), for failure to utilize such director's personal assets to satisfy the capital requirements of paragraphs 3(a) through 3(f) of this ORDER.
   4. (a) The Bank shall maintain an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Report of Condition and Income.
   (b) The allowance for loan and lease losses disclosed in Reports of Condition and Income filed by the Bank between April 23, 1986, and the effective date of this ORDER shall, at a minimum, reflect the adjustments required by paragraph 4(a) of this ORDER. If necessary to comply with this paragraph 4(b), the Bank shall file amended Reports of Condition and Income within 10 days from the effective date of this ORDER.
   (c) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the board of directors of the Bank shall: (1) review the adequacy of the Bank's allowance for loan and lease losses, (2) provide for an adequate allowance, and (3) accurately report the allowance in any such Report of Condition and Income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the allowance, and the basis for determining the amount of allowance provided.
   5. (a) Within 30 days from the effective date of this ORDER, the board of directors shall develop a written plan of action to lessen the Bank's risk position in each line of credit aggregating $30,000 or more which was classified "Substandard" as of April 23, 1986. In developing such Plan, the Bank shall, at a minimum:
       (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.
   Based upon such review and evaluation, the written plan of action shall: (A) establish target dollar levels to which the Bank will reduce each "Substandard" line of credit within six and 12 months from the effective date of this ORDER; and (B) provide for the submission of written monthly progress reports to the Bank's board of directors for review and notation in the board minutes. As used in this paragraph 5, "reduce" means to: (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC.
   (b) The written plan of action described by paragraph 5(a) and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner
{{4-1-90 p.A-1270}}for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written plan of action, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written plan of action and/or any subsequent modification.
   6. Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected, unless a majority of the Bank's board of directors first: (1) determines that such advance is in the best interest of the Bank, (2) determines that the Bank has satisfied the requirements set out in paragraph 5 of this ORDER as to such borrower, and (3) approves such advance. A written record of the board of directors' determination and approval of any advance under the terms of this paragraph 6 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the board of directors. The requirements of this paragraph 6 do not prohibit the Bank from renewing any credit already extended to the borrower.
   7. No more than 60 days from the effective date of this ORDER, the board of directors shall review the Bank's written loan policies and shall record the results of such review in the board of directors' minutes. Thereafter, the Bank, its directors, officers, and employees shall follow the written loan policies.
   8. (a) No more than 30 days from the effective date of this ORDER, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:
       (i) identification of the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (b) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification.
   9. The Bank shall not declare or pay any cash dividends unless:
   (a) Such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
   (b) After payment of such dividends, the equity capital ratio shall not be less than that required in paragraph 3(e)(i) of this ORDER;
   (c) Such declaration and payment of dividends shall be approved in advance by the board of directors of the Bank, which approval shall be recorded in the minutes of the board of directors; and
   (d) At least 30 days prior to the declaration of a cash dividend, written notice of the intention to declare such dividend shall be given to the Regional Director and the Commissioner for review and comment.
   10. Following the effective date of this ORDER, the Bank shall send to its shareholders 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, Registration and Disclosure Unit, Washington, D.C. 20429, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   11. No more than 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law committed by the Bank as described on
{{4-1-90 p.A-1271}}page 6-1 of the FDIC's Report of Examination of the Bank as of April 23, 1986.
   12. Following the effective date of this ORDER, the Bank shall not purchase loan participations from any other bank unless the Bank first:
   (a) obtains current and complete credit information from the selling bank;
   (b) requires that current and complete credit information and information regarding the accrual status and the status of all principal and interest payments during the term of each participation be provided by the selling bank;
   (c) performs a comprehensive credit analysis; and
   (d) a majority of the Bank's board of directors approves each such loan participation prior to its purchase, which approval shall be recorded in the minutes of the board of directors.
   13. The Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof every 90 days, beginning 90 days from effective date of the ORDER. In addition, the Bank shall furnish such reports on request of either the Regional Director or the Commissioner. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   14. This ORDER shall become effective as provided for in paragraph 2(c) of the Stipulation between the FDIC and the Bank dated October 21, 1987.
   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 May, 1988.

Hoyle L. Robinson
Executive Secretary

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

ORDER TO CEASE AND DESIST

   Having found that * * * Bank * * * ("Bank"), has engaged in unsafe or unsound banking practices and a violation of law within the meaning of section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and for the reasons set forth in the separate Decision of the Board of Directors of the Federal Deposit Insurance Corporation:
   IT IS HEREBY ORDERED, that the 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 and violation of law:
   A. operating with an excessive volume of adversely classified assets;
   B. engaging in hazardous lending and lax collection practices, including maintaining an excessive volume of adversely classified loans, extending credit without established repayment plans or specific methods of repayment, and extending credit with insufficient collateral protection for the type of credit extended and the financial position of the borrower(s);
1   C. operating with inadequate equity capital and allowance for loan and lease losses for the kind and quality of assets held;
   D. engaging in a violation of law;
   E. operating with management whose policies and practices are detrimental to the Bank;
   F. operating with deficient or inadequate loan documentation, including, but not limited to, failing to provide adequate documentation respecting current financial statements, asset appraisals, title searches or legal opinions, and cash flow and/or operating information;
   G. engaging in practices which produce inadequate operating income and excessive loan losses;
   H. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and a violation of law; and
{{4-1-90 p.A-1272}}
   I. operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held.
   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) No more than 30 days from the effective date of this ORDER, the Bank shall have and thereafter retain a qualified chief lending officer who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining lending policies in accord with sound banking practices. Such senior lending officer shall have an appropriate level of lending, collection and loan supervision experience for the type and quality of the Bank's loans. The Bank shall promptly notify the Regional Director of the FDIC's * * * Regional Office ("Regional Director") of the identity of said senior lending officer, and during the effective term of this ORDER any replacement for such officer, and shall submit to him a statement of his/her qualifications and a copy of his/her written authority.
   (b) The board of directors shall, in no more than 30 days from the effective date of this ORDER, develop a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:

       (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank;
       (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
       (iii) evaluation of each Bank officer, and in particular the chief lending officer, and staff member to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and
       (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the board of directors determines are necessary to fill Bank officer or staff member positions consistent with the board's analysis, evaluation, and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
   (c) The written management plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for the State of * * * ("Commissioner") for review and comment. No more than 30 days from the receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall approve the written management plan which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers and employees shall implement and follow the written management plan and/or any subsequent modification.
   (d) Effective the date of this ORDER, the Bank's board of directors shall meet at least monthly. The board shall prepare in advance and shall follow a detailed written agenda at each meeting, which shall include consideration of actions of any committees. Nothing in the foregoing sentence shall preclude the board from considering matters other than those contained in the agenda. Detailed written minutes of all board meetings shall be maintained and recorded on a timely basis.
       (e)(i) Within 60 days from the effective date of this ORDER, the Bank shall convene a meeting of its shareholders. At that meeting and at each succeeding meeting of the shareholders at which Bank directors are to be elected, the Bank shall nominate as candidates for election to the board of directors such number of individuals independent with respect to the Bank as are necessary to cause a majority of the board of directors to be and to remain independent with respect to the Bank.
       (ii) For purposes of this ORDER, an individual who is "independent with respect to the Bank" shall be any individual (1) who is not an officer of the Bank and who does not own more than five (5) percent of the outstanding shares of the Bank, (2) who is not related by blood, marriage, or common financial interest to an officer of the Bank or to any stockholder owning more than five (5) percent
    {{4-1-90 p.A-1273}}of the Bank's outstanding shares, and (3) who is not indebted to the Bank, directly or indirectly (including the indebtness of any entity in which the individual has a financial interest), in an amount exceeding $80,000.
   2. No more than 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss" as of April 18, 1986, which have not been previously collected, charged off, or otherwise eliminated by other proper entries. Reduction of these assets through the use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph.
   3. (a) No more than 60 days from the effective date of this ORDER, the Bank shall increase its equity capital by not less than $200,000. Such increase in capital may be accomplished by:
       (i) the sale of common stock; or
       (ii) the direct contribution of cash by the shareholders and/or directors of the Bank; or
       (iii) the reduction of all or part of assets classified "Loss" as of April 18, 1986, without loss or liability to the Bank. Reductions to loans and leases classified "Loss" shall first be credited to the Bank's allowance for loan and lease losses (hereafter "allowance") and, if the board of directors' review of the adequacy of the allowance required by paragraph 4 of this ORDER indicates that such allowance has a balance in excess of that required for adequacy, any such excess may be transferred to equity capital through a negative provision for loan and lease losses; or
       (iv) any combination of the above means; or
       (v) any other means acceptable to the Regional Director.
   (b) As used in paragraph 3(a)(iii) of this ORDER, "reduction" means to (1) collect or (2) improve the quality of the assets adversely classified to warrant removal of any "Loss" or "Doubtful" classification by the FDIC.
   (c) If all or part of the increase in total equity capital required by the Bank under paragraph 3(a) of this ORDER involves a 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 of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the sale of the securities, 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, Registration and Disclosure Unit, Washington, D.C. 20429, for review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (d) In complying with the provisions of paragraph 3(c) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank stock, written notice of any planned or existing development or other change which is 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 3(d) shall be furnished within ten (10) calendar days from the date such material development or change was planned or occurred, whichever is earlier, to every purchaser and/or subscriber of Bank stock who received or was tendered the information contained in the Bank's original offering materials.
       (e)(i) No more than 60 days from the effective date of this ORDER, the Bank shall have equity capital, exclusive of the allowance for loan and lease losses, at or in excess of six percent of the Bank's average total assets for the applicable month under calculation and shall continue to maintain its equity capital at or in excess of such level as calculated herein while this ORDER is in effect.
       (ii) For the purposes of paragraph 3(e)(i) of this ORDER, the term "applicable month under calculation" shall be each June and December, beginning with December 1987, and the ratio shall be calculated as of the last day of each such month; "equity capital," "the allowance for loan and lease losses," and "total assets" shall have the same meaning as
    {{4-1-90 p.A-1274}}those terms have in the prevailing Instructions for Preparation of Reports of Condition; and "average total assets" shall be the average of the sum of the Bank's daily total assets for the month under calculation.
   (f) If during the period this ORDER is in effect the ratio specified in paragraph 3(e)(i) declines below six percent, the Bank, within 30 days after the date on which the said ratio so declined, shall submit a written plan to the Regional Director for increasing the ratio up to or in excess of six percent within 60 days after the written plan is implemented. Upon approval by the Regional Director, the Bank shall immediately implement the written plan.
   (g) A written record of all actions taken by the Bank to comply with the capital requirements of paragraphs 3(a) through 3(f) of this ORDER shall be maintained in the minutes of the board of directors.
   (h) Nothing in this ORDER shall operate to subject any individual director of the Bank to a Federal district court order of enforcement pursuant to section 8(i)(1) of the Act, 12 U.S.C. § 1818(i)(1), or imposition of civil money penalties pursuant to section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2), for failure to utilize such director's personal assets to satisfy the capital requirements of paragraphs 3(a) through 3(f) of this ORDER.
   4. (a) The Bank shall maintain an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income.
   (b) The allowance for loan and lease losses disclosed in Reports of Condition and Income filed by the Bank between April 18, 1986, and the effective date of this ORDER shall, at a minimum, reflect the adjustments required by paragraph 4(a) of this ORDER. If necessary to comply with this paragraph 4(b), the Bank shall file amended Reports of Condition and Income within ten (10) days from the effective date of this ORDER.
   (c) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the board of directors of the Bank shall: (1) review the adequacy of the Bank's allowance for loan and lease losses, (2) provide for an adequate allowance, and (3) accurately report the allowance in any such Report of Condition and Income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the allowance, and the basis for determining the amount of allowance provided.
   5. (a) Within 30 days from the effective date of this ORDER, the board of directors shall develop a written plan of action to lessen the Bank's risk position in each line of credit aggregating $30,000 or more which was classified "Substandard" as of April 18, 1986. In developing such plan, the Bank shall, at a minimum:
       (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.
   Based upon such review and evaluation, the written plan of action shall: (A) establish target dollar levels to which the Bank will reduce each "Substandard" line of credit within six and 12 months from the effective date of this ORDER; and (B) provide for the submission of written monthly progress reports to the Bank's board of directors for review and notation in the board minutes. As used in this paragraph 5, "reduce" means to (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC.
   (b) The written plan of action described by paragraph 5(a) and any subsequent modification thereto shall be submitted to the Regional Director for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written plan of action, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers and employees shall follow the written plan of action and/or any subsequent modification.
   6. Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is un-
{{4-1-90 p.A-1275}}collected, unless a majority of the Bank's board of directors first (1) determines that such advance is in the best interest of the Bank, (2) determines that the Bank has satisfied the requirements set out in paragraph 5 of this ORDER as to such borrower, and (3) approves such advance. A written record of the board of directors' determination and approval of any advance under the terms of this paragraph 6 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the board of directors. The requirements of this paragraph 6 do not prohibit the Bank from renewing any credit already extended to the borrower.
   7. No more than 60 days from the effective date of this ORDER, the board of directors shall review the Bank's written loan policies and shall record the results of such review in the board of directors' minutes. Thereafter, the Bank, its directors, officers, and employees shall follow the written loan policies.
   8. (a) No more than 30 days from the effective date of this ORDER, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:
       (i) identification of the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance,
       (ii) realistic and comprehensive budgets,
       (iii) a budget review process to monitor the income and expense of the Bank to compare actual figures with budgetary projections, and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (b) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification.
   9. The Bank shall not declare or pay cash dividends in any amount unless:
   (a) Such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
   (b) After payment of such dividends, the Bank's capital ratio shall be not less than that required in paragraph 3(e)(i) of this ORDER;
   (c) Such declaration and payment of dividends shall be approved in advance by the board of directors of the Bank, which approval shall be recorded in the minutes of the board of directors; and
   (d) At least 30 days prior to the declaration of a cash dividend, written notice of the intention to declare such dividend shall be given to the Regional Director and the Commissioner for review and comment.
   10. Following the effective date of this ORDER, the Bank shall send to its shareholders 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, Registration and Disclosure Unit, Washington, D.C. 20429, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   11. No more than 60 days from the effective date of this ORDER, the Bank shall correct the technical exceptions on loans noted on page 2-d of the FDIC's Report of Examination of the Bank as of April 18, 1986.
   12. No more than 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct the violation of law committed by the Bank as described on page 6-1 of the FDIC's Report of Examination of the Bank as of April 18, 1986.
   13. Following the effective date of this ORDER, the Bank shall not purchase loan participations from any other bank unless the Bank first:
{{4-1-90 p.A-1276}}
   (a) obtains current and complete credit information from the selling bank;
   (b) requires that current and complete credit information and information regarding the accrual status and the status of all principal and interest payments during the term of each participation be provided by the selling bank;
   (c) performs a comprehensive credit analysis; and
   (d) a majority of the Bank's board of directors approves each such loan participation prior to its purchase, which approval shall be recorded in the minutes of the board of directors.
   14. The Bank shall furnish written progress reports to the Regional Director detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof every 90 days, beginning 90 days from effective date of this ORDER. In addition, the Bank shall furnish such reports on request of the Regional Director. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   15. This ORDER shall become effective as provided for in paragraph 2(e) of the Stipulation between the FDIC and the Bank dated September 4, 1987.
   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 May, 1988.

Hoyle L. Robinson
Executive Secretary

In the Matter of * * * BANK

(Insured State Nonmember Bank)

ORDER TO CEASE AND DESIST

   Having found that * * * Bank, * * * ("Bank") has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and for the reasons set forth in the separate Decision of the Board of Directors of the Federal Deposit Insurance Corporation:
   IT IS HEREBY ORDERED, that the 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 and unsound banking practices:
   A. operating with an excessive volume of adversely classified assets;
   B. engaging in hazardous lending and lax collection practices, including but not limited to maintaining an excessive volume of adversely classified loans, extending credit with insufficient collateral protection for the type of credit extended and the financial position of the borrower, and extending credit without established repayment plans or specific methods of repayment;
   C. operating with inadequate equity capital and allowance for loan and lease losses for the kind and quality of assets held;
   D. operating with management whose policies and practices are detrimental to the Bank;
   E. operating with deficient or inadequate loan documentation, including but not limited to failing to provide adequate documentation respecting current financial statements, current valuation of collateral, and cash flow and/or operating information;
   F. engaging in practices which produce inadequate operating income and excessive loan losses;
   G. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices;
   H. operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   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) No more than 30 days from the effective date of this ORDER, the Bank shall have and thereafter retain a qualified chief lending officer who shall be given stated written authority by the Bank's board
{{4-1-90 p.A-1277}}of directors, including responsibility for implementing and maintaining lending policies in accord with sound banking practices. Such senior lending officer shall have an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Bank's loans. The Bank shall promptly notify the Regional Director of the FDIC's * * * Regional Office ("Regional Director") of the identity of said senior lending officer, and during the effective term of this ORDER any replacement for such officer, and shall submit to him a statement of his/her qualifications and a copy of his/her written authority.
   (b) The board of directors shall, in no more than 30 days from the effective date of this ORDER, develop a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:

       (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank;
       (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
       (iii) evaluation of each Bank officer and in particular the senior lending officer, and staff members to determine whether these individuals possess the ability, experience, and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and
       (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience, and other qualifications, which the board of directors determines are necessary to fill Bank officer or staff member positions consistent with the board's analysis, evaluation, and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
   (c) The written management plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner * * * for the State of * * * ("Commissioner") for review and comment. No more than 30 days from the receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall approve the written management plan, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall implement and follow the written management plan and/or any subsequent modification.
   (d) Within 60 days from the effective date of this ORDER, the Bank shall take all steps necessary to increase the number of board members who are independent with respect to the Bank. 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 organizations, (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 indebtness of any entity in which the individual has a substantial financial interest in an amount exceeding $70,000.
   2. No more than ten (10) days from the effective date of this ORDER, the Bank shall eliminate from its books, by chargeoff, collection, or other proper entries, all assets or portions of assets classified "Loss" as of September 8, 1986.
   3. (a) No more than 60 days from the effective date of this ORDER, the Bank shall increase its equity capital by not less than $110,000 over the level existing as of September 8, 1986. Such increase in capital may be accomplished by:
       (i) the sale of common stock; or
       (ii) the direct contribution of cash by the shareholders and/or directors of the Bank; or
       (iii) the reduction of all or part of assets classified "Loss" as of September 8, 1986, without loss or liability to the Bank, provided any collection on such assets shall first be applied to that portion of the asset which was not charged off pursuant to paragraph 2 of this ORDER. Reductions to loans and leases classified "Loss" shall first be credited to the Bank's allowance for loan and lease losses (hereafter "allowance") and, if the
    {{4-1-90 p.A-1278}}board of directors' review of the adequacy of the allowance required by paragraph 4 of this ORDER indicates that such allowance has a balance in excess of that required for adequacy, any such excess may be transferred to equity capital through a negative provision for loan and lease losses; or
       (iv) the collection of cash in assets previously charged off; or
       (v) the retention of earnings; or
       (vi) any combination of the above means; or
       (vii) any other means acceptable to the Regional Director.
   (b) As used in paragraph 3(a)(iii) of this ORDER, "reduction" means to (1) collect or (2) improve the quality of the assets adversely classified to warrant removal of any "Loss" or "Doubtful" classification by the FDIC.
   (c) If all or part of the increase in total equity capital required by the Bank under paragraph 3(a) of this ORDER involves a 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 of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the sale of the securities, 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, Registration and Disclosure Unit, Washington, D.C. 20429, for review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (d) In complying with the provisions of paragraph 3(c) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank stock written notice of any planned or existing development or other change which is 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 3(d) shall be furnished within ten (10) calendar days from the date such material development or change was planned or occurred, whichever is earlier, to every purchaser and/or subscriber of Bank stock who received or was tendered the information contained in the Bank's original offering materials.
       (e)(i) No more than 60 days from the effective date of this ORDER, the Bank shall have equity capital, exclusive of the allowance for loan and lease losses, at or in excess of six percent of the Bank's average total assets ("equity capital ratio") and shall continue to maintain its equity capital ratio at or in excess of such level as calculated herein while this ORDER is in effect.
       (ii) For the purposes of calculating the equity capital ratio required by paragraph 3(e)(i) of this ORDER (A) the Bank's average total assets shall be the average of the sum of the Bank's daily total assets for the month ending June 30 or December 31, whichever nearest precedes the date of calculation; and (B) The terms "equity capital," "allowance for loan and lease losses," and "total assets" shall have the same meaning as those terms have in the prevailing Instructions for Preparation of Reports of Condition. Subsequent to the effective date of this ORDER, the equity capital ratio shall be computed as of June 30 and December 31, as appropriate.
   (f) If during the period this ORDER is in effect the ratio specified in paragraph 3(e)(i) declines below six percent, the Bank, within 30 days after the date on which the said ratio so declined, shall submit a written plan to the Regional Director and the Commissioner for increasing the ratio up to or in excess of six percent within 60 days after the written plan is implemented. Upon approval by the Regional Director and the Commissioner, the Bank shall immediately implement the written plan.
   (g) A written record of all actions taken by the Bank to comply with the capital requirements of paragraphs 3(a) through 3(f) of this ORDER shall be maintained in the minutes of the board of directors.
   (h) Nothing in this ORDER shall operate to subject any individual director of the Bank to Federal district court order of enforcement pursuant to section 8(i)(1) of the Act, 12 U.S.C. § 1818(i)(1), or imposition of civil money penalties pursuant to section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2), for failure to utilize such director's personal assets to satisfy the capital requirements of {{4-1-90 p.A-1279}}paragraphs 3(a) through 3(f) of this ORDER.
   4. (a) The Bank shall maintain an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income.
   (b) The allowance for loan and lease losses disclosed in Reports of Condition and Income filed by the Bank between September 8, 1986, and the effective date of this ORDER shall, at a minimum, reflect the adjustments required by paragraph 4(a) of this ORDER. If necessary to comply with this paragraph 4(b), the Bank shall file amended Reports of Condition and Income within 10 days from the effective date of this ORDER.
   (c) Prior to the submission of any Reports of Condition and Income required to be filed by the Bank after the effective date of this ORDER, the board of directors of the Bank shall: (1) review the adequacy of the Bank's allowance for loan and lease losses, (2) provide for an adequate allowance, and (3) accurately report the allowance in any such Report of Condition and Income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the allowance, and the basis for determining the amount of allowance provided.
   5. (a) Within 30 days from the effective date of this ORDER, the board of directors shall develop a written plan of action to lessen the Bank's risk position in each line of credit aggregating $50,000 or more which was classified "Substandard" as of September 8, 1986. In developing such plan, the Bank shall, at a minimum:
       (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.
   Based upon such review and evaluation, the written plan of action shall: (A) establish target dollar levels to which the Bank will reduce each "Substandard" line of credit within six and 12 months from the effective date of this ORDER; and (B) provide for the submission of written monthly progress reports to the Bank's board of directors for review and notation in the board minutes. As used in this paragraph 5, "reduce" means to (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC.
   (b) The written plan of action described by paragraph 5(a) and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written plan of action, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers and employees shall follow the written plan of action and/or any subsequent modification.
   6. Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected, unless a majority of the Bank's board of directors first (1) determines that such advance is in the best interest of the Bank, (2) determines that the Bank has satisfied the requirements set out in paragraph 5 of this ORDER as to such borrower, and (3) approves such advance. A written record of the board of directors' determination and approval of any advance under the terms of this paragraph 6 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the board of directors. The requirements of this paragraph 6 do not prohibit the Bank from renewing any credit already extended to the borrower.
   7. No more than 30 days from the effective date of this ORDER, the Bank shall revise its written loan policy which revision shall include, at a minimum:
       (i) the lending authority of the loan officer;
       (ii) the lending authority of a loan or executive committee, if any;
       (iii) the responsibility of the board of directors in reviewing, ratifying and approving loans;
    {{4-1-90 p.A-1280}}
       (iv) the guidelines under which unsecured loans will be granted;
       (v) the guidelines for rates of interest and terms of repayment for unsecured loans and secured loans;
       (vi) with regard to secured loans: (1) limitations on the amount advanced in relation to the value of the collateral, and (2) the documentation required by the Bank for each type of secured loan;
       (vii) the maintenance and review of complete and current credit files on each borrower;
       (viii) appropriate and adequate collection procedures, including, but not limited to, the actions to be taken against borrowers who fail to make timely payments;
       (ix) guidelines establishing limitations on the maximum volume of loans in relation to total assets;
       (x) appropriate limitations on extension of credit through overdrafts and cash items;
       (xi) the determination and documentation of sources and terms of loan repayment;
       (xii) retention of lien searches and appraisals covering personal property and liens on real estate;
       (xiii) maintenance of written, individual loan file comments by officers;
       (xiv) provision addressing the capitalization of accrued and unpaid interest on loans;
       (xv) procedures regarding designations of nonaccrual loans;
       (xvi) procedures for identifying, supervising, and collecting problem loans;
       (xvii) periodic review of the overdue, problem and/or adversely classified or special mention loans by the board of directors, so as to monitor management administration of such distressed credits, and to provide guidance.
   (b) The revised written loan policies shall be submitted to the Regional Director and the Commissioner who shall have 15 days from the date of submission for review and comment. No less than 15 days and no more than 30 days from the date of submission, the board of directors shall approve the written loan policies which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written loan policies.
   8. (a) No more than 30 days from the effective date of this ORDER, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:
       (i) identification of the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (b) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification.
       9. (a) No more than 30 days from the effective date of this ORDER, the board of directors shall develop a written funds management policy which shall include, at a minimum:
       (i) the Bank's liquidity needs and plans for insuring that such needs are met on an ongoing basis;
       (ii) goals and strategies for managing and/or improving the Bank's interest rate risk exposure;
       (iii) monitoring of the interest rate sensitivity of present investments and deposits and projections of the types of investments and deposits to improve such liquidity position; and
       (iv) coordination of the Bank's loan, investment, operating, and budget and profit planning policies with the written funds management policy.
{{4-1-90 p.A-1281}}
   (b) The written funds management policy and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days from the receipt of any comment from the Regional Director, the board of directors shall approve the written funds management policy which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers and employees shall follow the written funds management policy and/or any subsequent modification.
   10. The Bank shall not declare or pay any cash dividends unless:
   (a) Such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
   (b) After payment of such dividends, the equity capital ratio shall not be less than that required in paragraph 3(e)(i) of this ORDER;
   (c) Such declaration and payment of dividends shall be approved in advance by the board of directors of the Bank, which approval shall be recorded in the minutes of the board of directors; and
   (d) At least 30 days prior to the declaration of a cash dividend, written notice of intention to declare such dividend shall be given to the Regional Director and the Commissioner for review and comment.
   11. Following the effective date of this ORDER, the Bank shall send to its shareholders 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, Registration and Disclosure Unit, Washington, D.C. 20429, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   12. The Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof every 90 days, beginning 90 days from effective date of this ORDER. In addition, the Bank shall furnish such reports on request of either the Regional Director or the Commissioner. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
13.    This ORDER shall become effective as provided for in paragraph 3(c) of the Stipulation between the FDIC and the Bank dated October 21, 1987.
   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 May, 1988.

Hoyle L. Robinson
Executive Secretary

In the Matter of * * * BANK OF * * *
* * * BANK * * * BANK
(INSURED STATE NONMEMBER BANKS)
Arthur L. Beamon, Assistant General Counsel
* * *, Regional Counsel * * *,
Senior Regional Attorney * * *, Esq.
* * *, Esq. * * *, Esq. For the FDIC
* * *, Esq. * * *, Esq. * * *
For the Respondents



RECOMMENDED DECISION AND ORDER

   WILLIAM A. GERSHUNY, Administrative Law Judge: Three cases are consolidated for decision principally on a single legal issue: whether the FDIC is entitled, under Sec. 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(b), to affirmative relief in the cease-and-desist order requiring Respondent Banks to have "management acceptable to the [FDIC] Regional Director."
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   By agreement of the parties, the record in these consolidated cases consists solely of (1) the Notice of Charges in each case; (2) the written stipulation in each case; (3) the testimony of * * *, Assistant FDIC Regional Director, * * * - Region, taken on September 22, 1987 (Tr. 332-419); (4) the oral stipulations and representations of counsel made on the record during the September 8-9, 21-22, 1987 hearing; and (5) the post-hearing briefs.
   In each case, Respondent withdrew its answer to the Notice of Charges so as to limit the scope of the case to the issues presented here. By agreement of the parties, no factual evidence was to be offered and, to the extent that evidence had already been received in * * *, such evidence would not be referred to or relied upon by any party at any stage of the case. This means, for example, that this record, for decisional and administrative and judicial review purposes, does not include any of the FDIC reports of examination.
   Pursuant to Sec. 308.13(b) of the FDIC Rules and Regulations, and based on this limited record, I hereby make the following:

   Findings of Fact and Conclusions of Law

I. Jurisdiction

   Each notice alleges, and I find and conclude, that the Respondent Bank is subject to the jurisdiction of the FDIC and its rules and regulations.

II. The Violations

   Each notice alleges, and I find and conclude, that the Respondent Bank has engaged in unsafe or unsound banking practices. I adopt and incorporate herein by reference as my findings and conclusions all such allegations of the notices.
   Each notice alleges, and I find and conclude, that the management of the bank "caused or permitted" the Bank to engage in such practices; that the bank "has been operated with management whose policies and practices are detrimental to [the bank] and jeopardize the safety of [the bank's] deposits;" and that the "board of directors [of the bank] has failed to provide supervision and direction over the active officers of [the bank] to prevent" such practices.

III. The Recommended Cease-and Desist Orders

   Each Respondent has agreed to the entry of all affirmative relief provisions of the cease-and-desist order proposed by the FDIC in each case, except the provisions of Paragraph 1(a) and the first nine words of Paragraph 1(b). Accordingly, I adopt and incorporate herein as my recommended orders all such agreed-upon provisions.
   Two provisions of each FDIC-proposed order remain for consideration: one, the "management acceptable" clause; the other, the injunctive terms. The management acceptable clause is considered first.
   Sec. 8(b)(1) of the Act gives the FDIC broad discretion in framing a remedial order. In relevant part, it provides:

       ". . . if . . . the agency shall find that any violation or unsafe or unsound practice...has been established, the agency may issue...an order to cease and desist from any such violation or practice. Such order may, by provisions which may be mandatory or otherwise, require the Bank...to cease and desist from the same, and, further, to take affirmative action to correct the conditions resulting from any such violation or practice.
   This broad grant of remedial authority is not without limitations, however. Clearly, the agency may not, under Sec. 8(b), impose a civil money penalty on an insured bank or its officers or directors. Congress has specifically dealt with the subject of penalties in Sec. 18(j)(3), limiting the use of the civil money penalty to statutory violations (as distinguished from unsafe or unsound practices) and setting forth criteria for determining the amount of the penalty. Nor may the agency, under Sec. 8(b), terminate a bank's insured status. The authority is delegated in Section 8(a) of the Act. And similarly, the agency may not, under Sec. 8(b), remove an officer or director of any insured bank from office or prohibit further participation in any manner in the conduct of the affairs of the bank or any other insured bank. Sec. 8(e) of the Act specifically deals with removal, and sets forth stringent standards of proof and detailed procedural safeguards.
   It goes without saying that the quality of management is perhaps the single most important element in the safe and sound operation of a bank. And while Sec. 8(b) con-
{{4-1-90 p.A-1283}}tains no specific authority to appoint, remove, or approve bank management or limit its areas of responsibility. Congress has recognized the importance of management by granting authority to the agency under other provisions of the Act to assess the character, ability and performance of management. Sections 5(b) and 6, for example, dealing with applications for deposit insurance, authorize the assessment of the "general character of management;" Sec. 7(j)(7), dealing with applications for change of control, authorizes the agency to disapprove the application if "...the competency, experience or integrity of any acquiring person or of any of the proposed management ...would not be..." in the interest of the depositors or in the public interest; and Sec. 18(c)(5), dealing with bank mergers, authorizes the agency to assess "managerial resources." Moreover, the FDIC, through guidelines set forth in its Manual of Examination Policies, directs that examiners, as part of the nationwide CAMEL rating system, make a detailed assessment of management and assign each examined bank a numerical ranking from "1" to "5".
   Thus where Congress has determined that inept or unsuitable management may consitute a threat to the depositors or to the deposit insurance fund, it has delegated specific authority to the agency to deal with those threats by denying or terminating insured status, by refusing to approve acquisitions of control or mergers, by imposing civil money penalties, or by removal of officers and directors from office. It has not done so, however, under Sec. 8(b) of the Act.
   The FDIC recognizes that its authority under Sec. 8(b) to remedy unsafe or unsound banking practices and violations of law and regulation is not without limitations. Indeed, it has acknowledged in this case, on the record, that Sec. 8(b) does not empower it to remove, appoint, approve, or limit the authority of bank management. Counsel for the FDIC, "speaking for the FDIC...[and acknowledging] that the comments I'm making here are not intended as, obviously, my personal views or anything of that nature, but as the official position of the FDIC," (Tr. 32-33), engaged in the following colloquoy:

    THE COURT: By language in this [proposed order], does the FDIC contend that the FDIC has the right to notify the bank that certain management officials must be removed?
    MR. * * *: Absolutely not.
    THE COURT: So the FDIC adknowledges, as I think you had said before, that it has no such authority under 8(b), but that it will exercise its authority if it feels warranted only under 8(e)?
    MR. * * *: Correct. (Tr. 25)
    * * *

    THE COURT: Let me ask you, Mr. * * *: Is there something in this order that gives the FDIC, through its region or otherwise, the authority to place limitations on the functions or the rights of management other than have been expressly set forth in [the proposed order]?
    MR. * * *: No, Your Honor.
    THE COURT: Is there a reserve power which you are asking for?
    MR. * * *: No...(Tr. 32)
    * * *

       THE COURT: You used the phrase "in the bank's judgment.
       Mr. * * *: That's right. We are not intending to use this clause in any way to indicate that the composition of management of the bank as of the date of exam necessarily needs to be removed. And in fact, we clearly acknowledge that under Section 8(b) of the Act, the FDIC has no such authority...Rather, what we are saying is, it is the bank's job, not ours, to see to it that it is managed in a safe and sound manner. (Tr. 21)
   The "management-acceptable" clause at issue here would provide as follows:
       1(a). No more than 60 days from the effective date of this ORDER, the Bank shall provide, and thereafter continue to retain, management acceptable to the Regional Director of the Federal Deposit Insurance Corporation's ("FDIC") * * * Regional Office ("Regional Director") and the Commissioner of Commerce for the State of * * * ("Commissioner"). Such management shall include a qualified chief lending officer who shall be given stated written authority by the Bank's board of directors, including the responsibility for implementing and maintaining lending policies in accord with sound banking practices. The ac-
    {{4-1-90 p.A-1284}}ceptability of management shall be assessed on its ability to: (i) comply with the requirements of this ORDER, (ii) operate the bank in a safe and sound manner, (iii) comply with applicable laws and regulations, and (iv) maintain all aspects of the Bank in a safe and sound condition, including the asset quality, capital adequacy, earnings, management effectiveness and liquidity. As used in this paragraph, "maintain" includes improvement in quality if necessary to comply with this requirement.
   To better understand this provision, paragraph 1(b) of the proposed FDIC order, to which Respondents offer no objection (except for the 9-word introductory clause), must be considered. This provision requires the Bank to "develop a written analysis and assessment of the Bank's management and staffing needs" and to submit this written plan to the Regional Director and State Commissioner for "review and comment." This provision is similar to paragraph 5(b) of the proposed order, to which Respondents offer no objection, in that it calls for the Bank to submit a plan for review and comment. At the hearing, counsel for the FDIC represented that this provision does not, and is not intended to, give either of those officials the right to reject the plan, and that only an opportunity for review and comment is intended and is provided. (Tr. 14-17).
   I am unable to recommend that the orders in these cases include paragraph 1(a) or the first 9 words of paragraph 1(b) of the FDIC's proposed order for a number of reasons.
   First, the plain meaning of the proposed management-acceptable provision conflicts with the acknowledgement of the FDIC that it lacks authority under Sec. 8(b) of the Act to remove officers and directors, and with its representation that the provision is not intended to give it the authority to remove, appoint, or approve management, or limit the functions of such persons. The word "acceptable" connotes an authority to approve or disapprove. Indeed, the proposed provision sets up the criteria by which approval or disapproval of management is to be judged. The FDIC already assesses the ability of management to comply with applicable banking laws and regulations, and each examination report contains a numerical rating of management. Moreover, the FDIC already has means to enforce the other specific conditions and actions sought to be be remedied. To provide that management be acceptable to the Regional Director is to give him authority which the FDIC concedes it does not possess under Sec. 8(b) of the Act and does not in fact seek.

   [.10] Second, the management-acceptable provision conflicts with a fundamental precept of bank law—it is the responsibility of the bank, in the first instance, to determine its own management. The FDIC has the authority to reject an application for merger or acquisition or deposit insurance, because Congress specifically gave that authority. It may remove existing directors and officers under Sec. 8(e), because Congress specifically gave it that authority also. And it may impose penalties, or seek cease-and-desist orders, or terminate insurance because of faulty management, because Congress also gave it that authority. But as the FDIC acknowledged at the hearing, in all other contexts, it is left for the Bank to decide who its directors and officers shall be. The supervisory and enforcement responsibilities of the FDIC empower it to assess management, not appoint it, or remove it, or approve it, or limit its areas of responsibilities.
   Third, it is manifestly improper to delegate, under an FDIC order, enforcement authority to the State. The Act contains no such authority. Here, the proposed order would give the State Commissioner the authority to determine the acceptability of the management of these FDIC-insured banks.
   And fourth, the proposed provision is vague and would produce serious questions as to compliance and enforcement. FTC v. Henry Broch & Co., 368 U.S. 360, 367 (1961); FTC v. Cement Institute, 333 U.S. 683, 726 (1947). Is proposed paragraph 1(b) intended to replace the present practice and standards for assessment of management in connection with the CAMEL ratings? Would a determination of "unacceptable management" give rise to contempt proceedings, even if the Bank were in compliance with the myriad of other affirmative provisions of the order? Would the right to determine acceptability of management give the Regional Director and State Commissioner the power to condition its acceptance of management, and authorize them to impose job restrictions or minimum educational levels, or to require the employment of specific individuals? The proposed language does not answer any of these ques- {{4-1-90 p.A-1285}}tions. The hallmark of any judicial or administrative order should be clarity and precision, for the object of the order is to achieve compliance. Where, as here, FDIC-proposed order is vague, ambiguous and contradictory, it does little to advance the policies and purposes of the law.
   This is not to say that the recommended orders should not include provisions dealing with management. It must be remembered that the record in these cases include allegations and findings that the unsafe and unsound conditions were caused by management, that the banks have been operated with management whose policies and practices are detrimental to the bank and jeopardize the safety of the bank's deposits, and that the board of directors of the banks have failed to provide supervision and direction over the active officers of the Bank to prevent such practices. This are serious problems which any Sec. 8(b) order must address. The orders which I recommend do just that. They will contain many affirmative provisions dealing with the specific conditions and actions found to have resulted from the unsafe and unsound practices; they will contain injunctive provisions which will prevent a reoccurance of these practices; and they will require the Bank to conduct a self-examination of its management to better insure future compliance with banking laws and regulations.
   Accordingly, I recommend that the cease-and-desist orders issued by the FDIC not include paragraph 1(a) as proposed by counsel for the FDIC or the first 9 words of paragraph 1(b) (which become meaningless in light of the new paragraph 1(a)). Instead, I recommend that each order include a new paragraph 1(a), as follows:
   1(a). No more than 30 days from the effective date of this ORDER, the Bank shall designate a qualified chief lending officer who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining lending policies in accord with sound banking practices. The Bank shall promptly notify the Regional Director and the State Commissioner of the identity of said chief lending officer, and shall submit to them a copy of his written authority.

   [.11] I now turn to the second issue, the appropriateness of the injunctive provisions proposed by the FDIC. The Banks in these cases are charged in the Notices with having engaged in a number of unsafe or unsound banking practices. The allegations—and my findings and conclusions drawn from those allegations—are broad. Thus, for example, in the case of the * * * Bank * * *, the Notice alleges "hazardous lending and lax collection practices" and goes on to describe, in equally general terms, six such practices. The injunctive language of the three proposed orders fairly tracks these broad allegations, and are essential not only to curb existing practices, but to serve as a deterrent against future unsafe or unsound banking practices of a like kind. FTC v. Ruberoid Co., 343 U.S. 470, 473 (1952). Accordingly, I adopt and incorporate herein by reference as my recommended orders all injunctive provisions of the three FDIC-proposed orders.
   Dated: February 1, 1988

William A. Gershuny
Administrative Law Judge

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