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FDIC Enforcement Decisions and Orders

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   [5165] In the Matter of Mansfield Bank, Mansfield, Louisiana, Docket No. FDIC-90-44b(3-12-91)

   Bank ordered to cease and desist from unsafe and unsound banking practices. Board declined to use its discretion to delay publication of the cease and desist order, finding no "exceptional circumstances" under which publication would threaten the safety or soundness of the Bank. (This order was terminated by order of the FDIC dated 1-23-92; see ¶9005.)

   [.1] Cease and Desist Orders—Publication—Exceptional Circumstances
   Improved conditions, lack of insider abuse or violations of law, and Bank's location in an economically depressed area are not "exceptional circumstances" which would justify a delay in the publication of the cease and desist order.

   [.2] Cease and Desist Orders—Publication—Exceptional Circumstances
   To overcome the statutory presumption that publication is in the public interest, Bank must present evidence that a delay in publication is necessary to avoid a serious threat to the Bank's safety and soundness, such as a run on deposits.

   [.3] Examiners—Loan Classification—Review by ALJ
   Where the weight of the evidence supports FDIC examiner's adverse classification of assets, the Board upholds ALJ finding that the classification was not arbitrary and capricious or outside the zone of reasonableness.

In the Matter of

MANSFIELD BANK OF TRUST
COMPANY

MANSFIELD, LOUISIANA
(Insured State Nonmember Bank)
DECISION

I. INTRODUCTION

   This proceeding is brought by the Federal {{3-31-92 p.A-1698.14}}Deposit Insurance Corporation ("FDIC") against Mansfield Bank and Trust Company, Mansfield, Louisiana ("Insured Institution"), pursuant to section 8(b)(1) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(b)(1). The FDIC alleged that the Insured Institution had engaged in certain unsafe or unsound banking practices. The FDIC sought a Cease and Desist Order to halt the unsafe or unsound practices and to implement a rehabilitation plan to return the Insured Institution to a safe and sound condition. The Board of Directors ("Board") of the FDIC has reviewed the record, the parties' briefs and exceptions, and the Recommended Decision and Order of the Administrative Law Judge ("ALJ"). The Board agrees with the ALJ's findings and conclusion that the Insured Institution has engaged in unsafe or unsound banking practices. Specifically, the Insured Institution has been operating with inadequate capital, an excessive volume of poor quality assets, and inadequate earnings. The Board agrees with the ALJ's recommendation that a Cease and Desist Order ("Order") should be issued, but disagrees with his recommendation that public disclosure of the Order should be delayed for two years. Accordingly, the Board adopts the ALJ's Recommended Decision with the modifications discussed herein.

II. STATEMENT OF THE CASE

   On August 18, 1989, the FDIC conducted an examination of the Insured Institution and determined that it was operating: (1) with inadequate equity capital in relation to the kind and quality of its assets; (2) with an excessive volume of poor quality loans and other assets; (3) with improper lending and lax collection practices; and (4) with excessive loan losses, high overhead expenses, and an excessive volume of non-earning assets.
   Specifically, the August 18, 1989, FDIC examination found that the Insured Institution's condition had seriously deteriorated since the previous FDIC examination. Adversely classified assets totaled $5,930,000, with approximately $4,254,000 of the loans classified "Substandard" and $287,000 classified "Loss." Adversely classified loans represented 19.02 percent of the Insured Institution's loan portfolio. The Insured Institution had $1,216,000 in other real estate, comprised of foreclosed properties, classified "Substandard" and $14,000 classified "Loss." The Insured Institution's ratio of adversely classified assets to total equity capital and reserves was 198.59 percent, approximately twice the amount of the Insured Institution's capital. FDIC Exhibit ("Ex.") 2 at 1-a-4. In addition to the large volume of loans subject to adverse classification, the Report of Examination expressed concern about the Insured Institution's weak capital position, inadequate loan loss reserve, poor earnings, and lack of adequate supervision of its officers.1
   The Insured Institution's ratio of total capital to Part 325 total assets after adjustments for classified assets was 6.58 percent. FDIC Ex. 2 at 1-a-4. As a result of the examination, the Insured Institution was assigned a composite CAMEL rating of four, which indicates severe problems that threaten its viability.
   On March 22, 1990, the Regional Director (Supervision) of the FDIC's Memphis Regional Office ("Regional Director"), pursuant to delegated authority, issued a Notice of Charges and of Hearing ("Notice") requiring the Insured Institution to cease and desist from engaging in specified unsafe or unsound banking practices and to correct certain conditions. The Insured Institution contested the allegations of the Notice and a hearing before an ALJ was scheduled.
   A hearing was held before an ALJ, on August 28–30, 1990 in New Orleans, Louisiana. The ALJ issued a Recommended Decision ("R.D.") on November 16, 1990. Both parties filed exceptions to the ALJ's Recommended Decision.2

III. THE ALJ'S RECOMMENDED
DECISION

   The issues before the ALJ included whether the examiner was correct in the clas-


1 As of the August 18, 1989, examination, the reserve for loan losses was $449,000 which was considered inadequate due to the large volume of poor quality assets. The Insured Institution experienced net operating losses in 1986, 1987, and 1988. The examination states that the net operating profit of $40,000 as of June 30, 1989, will be negated by the return of reserves to an adequate level. FDIC Ex. 2 at 1-a-4.

2 The Insured Institution's exceptions reargue matters raised at the hearing and in its briefs. The FDIC's exceptions relate to the ALJ's finding that exceptional circumstances exist justifying a two year delay in publication of the Cease and Desist Order.
{{6-30-91 p.A-1698.15}}sification of "Substandard" for five loans disputed by the Insured Institution, whether the record in this matter supports issuance of the Cease and Desist Order, and whether publication of the Order is appropriate.
   The ALJ analyzed at length the five loans

[Next page is A-1699.]

{{6-30-91 p.A-1699}}classified "Substandard" in the August 18, 1989, FDIC examination.3 For each loan, the ALJ discussed the examiner's basis for the classification and the Insured Institution's concerns. The ALJ concluded that the classifications were based on in-depth analysis and are not arbitrary and capricious. R.D. at 48–50.
   The ALJ concluded that the record supports a finding that the Insured Institution has a large volume of poor quality loans and assets, inadequate loan reserves, and inadequate capital, all of which present a risk of loss or damage to the institution, its depositors, and the Bank Insurance Fund. R.D. at 23. He found that the Insured Institution's board of directors and management should have acted earlier to address the Insured Institution's deteriorating condition. R.D. at 28. The ALJ noted that the Insured Institution's primary problem is its extremely heavy volume of adversely classified assets which has weakened earnings and depleted capital. R.D. at 52–53. Notwithstanding the Insured Institution's presentation of evidence of some improvements in its condition, the ALJ concluded that a Cease and Desist Order should be entered.4 R.D. at 62. However, the ALJ concluded that the facts merit a two year delay in publication of the Cease and Desist Order.

IV. DISCUSSION

   Based upon review of the record, the Board finds that the ALJ's Findings of Fact and Recommended Decision were correct as to the unsafe or unsound practices of the Insured Institution and its serious financial condition as of the FDIC examination. The Board also agrees that, based on the circumstances existing at that time, a formal Cease and Desist Order is justified. As to the issue of delay in the publication of the Cease and Desist Order, the Board disagrees with the ALJ's Recommended Decision as discussed below.

A. Publication of the Cease and Desist
Order

   The Insured Institution requested that publication of a Cease and Desist Order be delayed, claiming that it would be detrimental to the institution and that the progress it has made in improving its condition could be quickly undone by a single press release.5 Insured Institution's Brief at 14. The ALJ agreed that publication should be delayed. FDIC Enforcement Counsel assert in their exceptions that the ALJ's recommended two-year delay is unsupported by statutory authority and is arbitrary and capricious. FDIC's Exceptions at 3.
   Section 1818(u)(1) provides, in pertinent part, that "the [FDIC] shall publish and make available to the public any final order issued with respect to any administrative enforcement proceeding...."6 12 U.S.C. § 1818(u)(1)(A). This provision was added to the statute in response to Congressional concern that bank regulatory agencies have traditionally kept enforcement actions secret which, in the opinion of Congress, does not deter financial institutions from misconduct. This concern was specifically addressed by the Committee on Banking, Finance and Urban Affairs:

    Section 913: The bank regulatory agencies, with infrequent exceptions, do not disclose civil enforcement actions. (They are the only federal regulatory agencies which do not do so.)

    * * *

    One of the problems in the financial industry...has been the excessive secrecy of agency supervisory actions. Such secrecy does little to deter misconduct, but


3 The five Substandard loan classifications disputed by the Insured Institution are:
$278,000.00

311,000.00

107,000.00

215,000.00

384,000.000

                                             TOTAL      $1,295,000.00

4 A procedural issue arose concerning the operative date for a State of Louisiana examination of the Insured Institution's condition as of March 16, 1990, several days before issuance of the March 22, 1990 Notice. The ALJ determined that the operative date for the State examination was June 5, 1990, the date the report was transmitted. He concluded that, under 12 C.F.R. § 308.38(a)(2), the State examination report may only be used to fashion a remedy. R.D. at 17–18.

5 The Insured Institution's exceptions also assert that public disclosure would be detrimental.

6 This provision was added to the FDI Act by section 913 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, 103 Stat. 183 (August 9, 1989).
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    does serve to ultimately worsen the problems of financial institutions....
H.R. Report No. 101-54, 101st Cong., 1st Sess., Pt. 1, at 470 (1989).
   The legislative history further reveals that the financial institutions regulatory agencies' policy of nondisclosure of enforcement actions has been harshly criticized in congressional reports and during congressional hearings. This criticism prompted Congress to propose several bills recommending, among other things, disclosure of enforcement actions taken by banking regulatory agencies.7
   The House Committee on Government Operations addressed the need for broader disclosure of banking agencies' enforcement actions in two Committee reports.8 The Committee viewed the financial regulatory agencies' refusal to consider disclosure of enforcement actions as unreasonable. Id. More recently, Congress enacted the Crime Control Act of 1990, Pub. L. No. 101–647, § 2457, 104 Stat. 4789 (1990), which requires that all aspects of insured institution enforcement actions routinely be made public. Id. at 4886.
   Therefore, it is clear that Congress has decreed that, except in unusual circumstances, public policy now favors publication of enforcement orders.

B. Exceptional Circumstances Are Not
Present Within The Meaning of 12 U.S.C.
§ 1818(u)(2).

   Section 1818(u) of the FDI Act, 12 U.S.C. § 1818(u), directs the FDIC to publicly disclose final agency enforcement orders, but provides discretion to delay such publication under "exceptional circumstances" which "would seriously threaten the safety or soundness of an insured depository institution." 12 U.S.C. § 1818(u)(2). The Insured Institution and the ALJ have asserted that the progress the Insured Institution has made could be quickly undone by adverse publicity. R.D. at 62; Insured Institution's Exceptions at 6; Insured Institution's Reply Brief at 14. The Board has considered, and rejects, the arguments presented in the Insured Institution's exceptions as to a delay in public disclosure of the Cease and Desist Order.

   [.1] The "exceptional circumstances" which in the judgment of the ALJ merit delaying publication include: (1) the progress the Insured Institution has made since the August 18, 1989, FDIC examination in correcting problems in its loan portfolio and other identified weaknesses;9 (2) the lack of insider abuse at the Insured Institution; (3) the absence of violations of law; (4) evidence that the Insured Institution is located in an "overbanked," economically depressed community;10 and (5) expert testimony by the Louisiana State Deputy Banking Commissioner and the FDIC Examiner that the Insured Institution needs breathing room.11 The Insured Institution argues that publication of the Cease and Desist Order would have "disastrous effects" on the Insured Institution. Insured Institution's Exceptions at 5. Finally, the Insured Institution and the ALJ characterize the Cease and Desist Order as carrying a "penalty" of mandatory publication.12 R.D. at 14.

   [.2] The Board disagrees. In this situation, the unsubstantiated assertion that adverse publicity would harm the Insured Institution and its customers does not warrant delay of publication. To hold otherwise


7 See H.R. 3929 (Section 117— "Availability of Redacted Civil Enforcement Orders"); H.R. 5094 (Title VI of the Depository Institutions Act of 1988); and H.R. 32. These bills were never passed but the concept of disclosure and language from these bills, with slight modification, was ultimately incorporated into Title IX of FIRREA.

8 See House Committee on Government Operations, "Federal Response to Criminal Misconduct and Insider Abuse in the Nation's Financial Institutions," H.R. Report 98–1137, 100th Cong., 2d Sess., October 4, 1984 and "Combating Fraud, Abuse and Misconduct in the Nation's Financial Institutions: Current Federal Efforts are Inadequate," H.R. 100–1088, 98th Cong., 2d Sess., October 13, 1988.

9 Further, to the extent that it is determined objectively that the Insured Institution's condition has improved, the Cease and Desist Order can be modified or even terminated by the Regional Director, if circumstances warrant. Thus, any evidence of improvement in the Insured Institution's condition can be taken into account in determining its compliance with the Cease and Desist Order.

10 Five depository institutions compete for customers in the Mansfield community. The Insured Institution's management also stated that local newspapers are aggressive, and that publication of a Cease and Desist Order will cause residents to assume that insider abuses are present in the Insured Institution, as was the case in Vernon Savings Bank in nearby Texas.

11 The Board also notes that the Insured Institution has already received the time period of the pendency of this action (one year since issuance of the Notice) to effect correction and has therefore already had, as the ALJ termed it, the benefit of a substantial amount of breathing room.

12 The Board rejects this characterization which also appears in the ALJ's Findings of Fact No. 69 at 14.
{{6-30-91 p.A-1701}}would undermine the disclosure policy and render the statutory requirement a nullity. "Exceptional circumstances" within the meaning of 12 U.S.C. § 1818(u)(2) are circumstances which would seriously threaten the safety and soundness of the institution. For example, it is the Board's view that the test would be met if evidence were presented and verified by FDIC supervisory personnel that an institution was located in an area vulnerable to deposit runs based on recent or historic experience, and that delay was necessary to avoid a run and the further weakening of the institution's financial condition. The Insured Institution, as the party seeking the delay, has simply not presented sufficient evidence that publication would seriously threaten the safety and soundness of the institution, to overcome the statutory presumption that publication is in the public interest.
   Accordingly, the Board finds insufficient evidence that publication would seriously threaten the safety and soundness of the Insured Institution.13 Moreover, the Board has weighed the possible negative effects of publication against the interests of customers and depositors of the Insured Institution and the public at large, and has determined that these individuals have the right to disclosure of the Insured Institution's true financial condition and declines to delay publication of the Cease and Desist Order.
   The Board acknowledges that this record contains no evidence of insider misconduct. However, the Decision and the Cease and Desist Order have been carefully drafted to make clear that no insider misconduct is present at this Insured Institution. Thus, the Board modifies this Recommended Decision by declining to adopt certain portions of the ALJ's discussion, findings and conclusions on the publication issue.14

C. Other Matters Raised in Exceptions

   The Insured Institution's exceptions also reiterate arguments that: (1) the five disputed loans were improperly classified for limited reasons; (2) the operative date for the State examination was March 16, 1990; and (3) the facts do not merit issuance of the Cease and Desist Order.

1. The Five Disputed Loan Classifications

   The Insured Institution asserts that the * * * loan was classified "Substandard" due to the debtor's advanced age, but that the loan is current and, therefore, incorrectly classified. Insured Institution's Exceptions at 8. However, the ALJ notes that this credit may require repayment from either the sale of collateral or from the borrower's estate. R.D. at 49. The Insured Institution's records did not contain enough information to address these contingencies. Accordingly, the ALJ concluded, and the Board agrees, that this loan was properly classified "Substandard."
   Regarding the * * * loan, the Insured Institution asserts that it was classified because of the borrower's association with the oil industry, notwithstanding the fact that his payments were current. Insured Institution's Exceptions at 8. The ALJ notes, and the Board agrees, that the Insured Institution has failed to rebut the identified problems with this credit, which include inadequate collateral and teh unconfirmed status of the borrower's liquidity and ability to continue to repay the loan. R.D. at 49–50.
   Regarding the * * * and * * * loans, the Insured Institution asserts that they were classified due to an incorrect finding that they were not secured by deposits. Insured Institution's Exceptions at 8–9. It argues that the FDIC examiner was not aware that deposits were "pledged" to secure these loans.15 However, the ALJ states, and the Board agrees, that the * * * and * * * loans have


13 The Board declines to determine whether FDIC Enforcement Counsels' narrow interpretation of section 1818(u)(2), set forth in their exceptions, that pending insolvency is the only circumstance that would seriously threaten the safety and soundness of the Insured Institution is proper.

14 Accordingly, the Board declines to adopt Findings of Fact No. 69 at 14–15. The Board also declines to adopt the discussion beginning with "Nonetheless, ..." on the bottom of page 42; further, the Board declines to adopt the ALJ's discussion of publication beginning with the phrase "but not with the consideration next discussed...." at the end of the last full paragraph on page 59 through the end of the Recommended Decision on page 62.

15 The examiner was unaware that, by operation of Louisiana Revised Statute 6:316, the deposits in operating accounts were pledged, meaning the Insured Institution would have a right of offset in the event of default. However, the balance in these operating accounts was variable and the Insured Institution did not require the borrower to maintain a specific balance as security for the loans.
{{6-30-91 p.A-1702}}other weaknesses supporting the "Substandard" classification.16
   The Insured Institution asserts that the * * * loan was improperly classified "Substandard" because the examiner undervalued the collateral.17 The FDIC examiner classified this loan due to an inadequate payment history, long amortization period and a lack of financial information. R.D. at 46. Further, between the time of the FDIC examination and Notice date, the debt was reduced by $137,000.00. However, the ALJ found, and the Board agrees, that the fact that a portion of the * * * loan has been repaid does not mean it was misclassified by the FDIC in August 1989.
   Finally, the Insured Institution asserts that the loans were improperly classified "Substandard" due to stale inventory. The examiner stated there was a lack of financial information establishing the value of the inventory which was the collateral for these loans in the Insured Institution's files. Further, the FDIC examination indicated that the borrower had a negative net worth and was experiencing cash flow problems. FDIC Ex. 2 at 2-b-20.

   [.3] Accordingly, the Board finds that the Insured Institution's exceptions concerning these loan classifications fail to address the detailed analyses and conclusions of the examiner and lack merit. The Board agrees with the ALJ that the weight of the evidence demonstrates that the "Substandard" classification of these credits was not arbitrary and capricious or outside the zone of reasonableness.18 R.D. at 48.

2. The State Examination

   The Insured Institution excepts to the ALJ's determination that the State examination is inadmissible as "evidence concerning an act or event after the Notice date." 12 C.F.R. § 308.38(a)(2) and (3). The ALJ had found the operative date for the State examination to be its June 5, 1990 transmittal date. The ALJ ignored the fact that the State examination assessed the condition of the Insured Institution as of March 16, 1990 and that each page of the report bears the date March 16, 1990. The Board agrees with the Insured Institution that the operative date is March 16, 1990, since the report determines the Insured Institution's condition as of that date. The State examination is not evidence of "any act or event occurring after the date of the Notice" under the terms of 12 C.F.R. § 308.38(a)(2). Accordingly, the Board does not adopt the ALJ's analysis or conclusion concerning this procedural issue.19 While the State examination differs from the FDIC examination as to individual loan classifications, overall it corroborates the FDIC's findings that the Insured Institution was in a weakened financial condition, with a composite CAMEL rating of four. Therefore, the Board finds it unnecessary and immaterial to resolve the discrepancies as to individual loan classifications.

V. CONCLUSION

   The Board has carefully reviewed the entire record in this proceeding, including the ALJ's Recommended Decision, the transcripts, briefs, and exceptions. The Insured Institution remains in a weakened financial condition with a high volume of adversely classified assets, inadequate earnings, and depleted capital. The Board concludes that the Insured Institution has engaged in unsafe or unsound practices and is in a weakened financial condition. Therefore, the issuance of a Cease and Desist Order is supported by substantial evidence and in the best interest of the Insured Institution, its depositors, and the insurance fund.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 12th day of March, 1991.
/s/ Hoyle L. Robinson
Executive Secretary


16 The * * * and * * * loans are actually several unsecured notes. Information in the Insured Institution's files as of the August 18, 1989, examination disclosed that * * * and * * * was in a weakened financial condition and operating at a loss. FDIC Ex. 2 at 2-b-22.

17 The Insured Institution also asserts that the examiner overlooked an appraisal in the file. However, the examination report discloses that the borrower had been delinquent, and the borrower's income and expense data was incomplete.

18 The Board considers the ALJ's statement (R.D. at 22), "However, almost all classified assets are merely substandard and mostly collectable," to be speculation.

19 The ALJ's Findings of Fact No. 58 and 62 refers to the State report as "issued June 5, 1990" or the "June 1990" report. The Board deletes from Findings of Fact No. 58 on page 12 the language: "after the Notice of Charges"; from Findings of Fact No. 62 on page 13, by deleting the language: "June."
   The Board declines to adopt Conclusion of Law No. 9 which appears on pages 17 and 18, and the ALJ's discussion of this issue which appears as item E on page 33 through the top half of page 37.
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In the Matter of
MANSFIELD BANK AND TRUST
COMPANY
MANSFIELD, LOUISIANA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-90-44b

   The Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC"), having considered the record and the applicable law, finds and concludes that the Mansfield Bank and Trust Company, Mansfield, Louisiana ("Insured Institution"), as set forth in this Decision, has engaged in unsafe or unsound banking practices within the meaning of section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1):
   Accordingly, IT IS HEREBY ORDERED, that the Insured Institution, its directors, officers, employees, agents, successors, assigns, and other institution—affiliated parties of affairs of the Insured Institution, cease and desist from the following unsafe or unsound banking practices:

       (a) operating with improper lending and lax collection practices;
       (b) operating with inadequate primary capital;
       (c) operating with a large volume of poor quality loans;
       (d) operating with an inadequate loan valuation reserve;
       (e) operating in such a manner as to produce low earnings;
       (f) operating with management whose policies and practices are detrimental to the Insured Institution and jeopardize the safety of its deposits; and
       (g) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Insured Institution.
   IT IS FURTHER ORDERED, that the Insured Institution take affirmative action as follows:
1. (a) During the life of this ORDER, the Insured Institution shall have management qualified to restore the Insured Institution to a safe and sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible for supervising the Insured Institution's overall lending function. The chief executive officer and the senior lending official may be the same individual.
   (b) Present management shall be assessed on its ability to:
       (i) comply with the requirements of this ORDER;
       (ii) improve and thereafter maintain the Insured Institution in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, and earnings adequacy; and
       (iii) comply with all applicable State and Federal laws and regulations.
(c) (i) During the life of this ORDER, the Insured Institution shall notify the Regional Director (Supervision) of the FDIC's Memphis Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the State of Louisiana ("Commissioner") in writing of any resignations and/or terminations from its board of directors and senior executive officers.
       (ii) The Insured Institution shall comply with 12 U.S.C. § 1831i, which includes a requirement that the Insured Institution shall notify the Regional Director and the Commissioner in writing of any additions to its board of directors and senior executive officers. The notification must include the identity, personal history, business background, and experience, including the individual's business activities and affiliations during the past five (5) years, and a description of any material pending legal (State or Federal Court) or administrative proceedings to which the individual is a party. The notification shall be provided at least 30 days prior to the individual assuming the new position, and the Insured Institution may not add such individual if the Regional Director issues a notice of disapproval of such addition before the end of the 30 day period beginning on the date the Regional Director receives notice of the proposed action.
   (d) For purposes of this ORDER the term "senior executive officers" shall mean the chairman and vice-chairman of the board of directors, the president, each vice president, and the senior lending officer of the Insured Institution. The term shall also include any persons who have {{6-30-91 p.A-1704}}the functions, duties, or responsibilities normally associated with those titles but are not specifically so named.
   (e) Within 30 days of the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure that the Insured Institution complies with the provisions of this ORDER. At least two-thirds of the members of such committee shall be independent, outside directors as defined herein. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.
   (f) For the purposes of this ORDER, an "outside director" shall be an individual:
       (i) who shall not be employed, in any capacity, by the Insured Institution or its affiliates other than as a director of the Insured Institution of an affiliate;
       (ii) who shall not own or control more than 5 percent of the voting stock of the Insured Institution or its holding company;
       (iii) who shall not be indebted to the Insured Institution or any of its affiliates in an amount greater than 5 percent of the Insured Institution's primary capital;
       (iv) who shall not have an extension of credit from the Insured Institution that is adversely classified in any Report of Examination and/or Visitation;
       (v) who shall not be related to any directors or principal shareholders of the Insured Institution or affiliates of the Insured Institution; and
       (iv) who shall be a resident of, or engage in business in, the Insured Institution's trade area.
   2. (a) Within 180 days of the effective date of this ORDER, the Insured Institution shall increase its primary capital by no less than $400,000. Within 180 days of the effective date of this ORDER, and during the life of this ORDER, the Insured Institution shall maintain adjusted primary capital equal to or greater than seven and one-half (7.5) percent of the Insured Institution's adjusted Part 325 total assets.
   (b) Any increase in primary capital necessary to meet the requirements of Paragraph 2(a) of this ORDER may be accomplished by the following:
       (i) the sale of new securities in the form of common stock; or
       (ii) the direct contribution of cash by the directors, shareholders, or parent bank holding company of the Insured Institution; or
       (iii) the collection in cash of assets classified "Loss" without loss or liability to the Insured Institution; or
       (iv) the collection of assets previously charged off; or
       (v) any other method acceptable to the FDIC.
   (c) If all or part of the increase in primary capital required by Paragraph 2(a) of this ORDER is accomplished by the sale of new securities of any kind or should there be a plan involving a public distribution of Insured Institution securities (including a distribution limited only to the Insured Institution's existing shareholders), the Insured Institution shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Insured Institution and the circumstances giving rise to the offering, and any other material disclosure necessary to comply with Federal securities laws. Prior to the implementation of the plan and, in any event not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, Washington, D.C. 24029. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination.
   (d) In complying with the provisions of Paragraph 2 of this ORDER, the Insured Institution or holding company shall provide to any subscriber and/or purchaser of Insured Institution securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Insured Institution Securities. The written notice re- {{6-30-91 p.A-1705}}quired by this paragraph shall be furnished within 10 days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of Insured Institution Securities who received or was tendered the information contained in the Insured Institution's original offering materials.
   (e) For purposes of this ORDER, the terms "primary capital," "total capital," and "Part 325 total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules of Practice and Procedures, respectively, subsections 325.2(h), 325.2(1), and 325.2(k), 12 C.F.R. § 325.2(h), (1), and (k). The "Analysis of Capital" schedule on page 3 of the FDIC's Report of Examination provides the method for determining the ratio of adjusted primary capital to adjusted Part 325 total assets as required by this ORDER.
3. (a) Within 60 days of the effective date of this ORDER, and within the first 30 days of each calendar year thereafter, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Insured Institution for each calendar year. The 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 Insured Institution's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Insured Institution to compare actual figures with budgetary projections on not less than a quarterly basis; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support major projected income and expense components.
   (b) Each 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 Insured Institution, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification.
4. (a) Within 10 days of the effective date of this ORDER, the Insured Institution shall eliminate from its books to the extent it has not already, by charge-off or collection, all assets classified "Loss" and one-half of the assets classified "Doubtful" as of August 18, 1989. Reduction of these assets through proceeds of other loans made by the Insured Institution is not considered collection for the purpose of this paragraph.
   (b) Within 90 days of the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of August 18, 1989, and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $5,000,000.
   (c) Within 180 days of the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of August 18, 1989, and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $4,500.000.
   (d) Within 360 days of the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of August 18, 1989, and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $3,750,000.
   (e) The requirements of Paragraphs 4(a), 4(b), 4(c), and 4(d) above are not to be construed as standards for future operations, and, in addition to the foregoing, the Insured Institution shall eventually reduce the total of all adversely classified assets. As used in Paragraphs 4(b), 4(c), 4(d), and 4(e) the word "reduce" means (i) to collect, (ii) to charge-off, or (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.
   5. (a) Beginning with the effective date of this ORDER, the Insured Institution shall {{6-30-91 p.A-1706}}not make any further extension of credit to any borrower whose loans are charged off, in whole or in part, or are adversely classified "Loss" as of August 18, 1989, and remain uncollected.
   (b) Beginning with the effective date of this ORDER, the Insured Institution shall not make any further extension of credit to any borrower thereof whose loans in the aggregate exceed $50,000 and are adversely classified "Substandard" as of August 18, 1989, unless such extension has been approved by a majority of the Insured Institution's board of directors in advance, and the Insured Institution's board of directors has detailed in the written minutes of the meeting how it has affirmatively determined all of the following: (i) that the extension of credit is in full compliance with the Insured Institution's loan policy, (ii) that it is necessary to protect the Insured Institution's interest or that the extension of credit is adequately secured, (iii) that based upon credit analysis the customer is deemed to be creditworthy, and (iv) that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title, and lien documents. The minutes shall also include the following information about the extension of credit: (i) the amount adversely classified as of August 18, 1989, (ii) the current balance, (iii) the amount of credit requested, (iv) a description of the collateral and its value securing the credit, and (v) a full description of the documentation presented to the board of directors including the date of the borrower's most recent financial information and the borrower's current income or cash flow data.
   (c) Beginning with the effective date of this ORDER, the Insured Institution shall not renew any loan without the full collection of interest due. The issuance of separate notes to the borrowing customer or a third party, the proceeds of which pay interest due, shall not satisfy the requirements of this paragraph unless these separate notes receive prior board of director approval in the same manner as outlined in Paragraph 5(b).
   6. Within 60 days of the effective date of this ORDER, the Insured Institution shall review its written loan policy and make whatever changes may be necessary to provide for the safe and sound administration of all aspects of the lending function. Proper and adequate loan documentation or evidence thereof as is required by sound banking practices before disbursement of the loan proceeds to borrowers or before renewal or extensions of existing loans shall be part of the review. Evident of the review and establishment of procedures to ensure compliance with the loan policy shall be reduced to writing. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/ or visitations.
7. (a) Within 30 days of the effective date of this ORDER, the board of directors shall establish an internal loan review and grading system ("System") to periodically review the Insured Institution's loan portfolio and identify and categorize problem credits. At a minimum, the System shall provide for:
       (i) identifying the overall quality of the loan;
       (ii) the identification and amount of each delinquent loan;
       (iii) an identification or grouping of loans that warrant the special attention of management;
       (iv) for each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the reason(s) why the particular loan merits special attention;
       (v) an identification of credit and collateral documentation exceptions;
       (vi) the identification and status of each violation of law, rule, or regulation to the extent that it occurs in the future;
       (vii) identification of loans not in conformance with the Insured Institution's lending policy, and exceptions to the Insured Institution's lending policy;
       (viii) an identification of insider loan transactions; and
       (ix) a mechanism for reporting periodically, no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.
   (b) A copy of the reports submitted to the board of directors, as well as documentation of the action taken by the Insured Institution to collect or strengthen {{5-31-92 p.A-1707}}assets identified as problem credits, shall be kept with the minutes of the board of directors.
8. (a) Within 30 days of the effective date of this ORDER, the Insured Institution shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve shall be established by charges to current operating income, together with collection of assets previously charged off. In complying with the provision of this paragraph, the board of directors of the Insured Institution shall review the adequacy of the Insured Institution's reserve for loan losses prior to the end of each quarter. The minutes of the board of directors' meeting at which such review is undertaken shall indicate the results of the review, the amount of any increase in the reserve, and the basis for determination of the amount of the reserve provided.
   (b) Within 30 days of the effective date of this ORDER, the Insured Institution shall review all Reports of Condition and Income filed with the FDIC on and after August 18, 1989, and shall amend and file with the FDIC amended Reports of Condition and Income which accurately reflect the financial condition of the Insured Institution as of the date of each such Report. At a minimum, each such Report shall be amended to reflect elimination of all assets classified "Loss" and one-half of the assets classified "Doubtful" as required by Paragraph 4 of this ORDER and shall incorporate an adequate reserve for loan losses accurately reflecting the Insured Institution's loan portfolio as of August 18, 1989, as required by Paragraph 7(a).
   9. Within 60 days of the effective date of this ORDER, the Insured Institution shall revise and adopt a written liquidity and funds management policy. Such policy shall include the establishment of acceptable ranges of ratios in the following areas: volatile liability dependence, total loans to total deposits, and temporary investments to volatile liabilities. In addition, the liquidity policy shall incorporate a funds management program which designates acceptable levels for: volatile liabilities, including borrowing; asset mix, including temporary funds and investments; long-term investment securities and classes of obligor; loans to deposits; and rate-sensitive assets as a percent of ratesensitive liabilities. The written liquidity and funds management policy shall be submitted to the Regional Director and the Commissioner for review and comment.
   10. While this ORDER is in effect, the Insured Institution shall not declare or pay cash dividends on its capital stock without the prior written approval of the Regional Director and the Commissioner.
   11. Following the effective date of this ORDER, the Insured Institution shall send to its shareholders or otherwise furnish a description of this ORDER, (i) in conjunction with the Insured Institution's next shareholder communication, and also (ii) in conjunction with its notice or proxy statement preceding the Insured Institution'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 Section, 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. On the fifteenth day of the second month following the effective date of this ORDER, and on the fifteenth day of every third month thereafter, the Insured Institution 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. Such reports may be discontinued when the corrections required have been accomplished and the Regional Director has released the Insured Institution in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Insured Institution, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties.
   This ORDER shall become effective 10 days from the date of its issuance.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision 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 12th day of March, 1991.

{{5-31-92 p.A-1708}}

___________________________________________
RECOMMENDED DECISION

In the Matter of
Mansfield Bank & Trust Company
Mansfield, Louisiana

Paul S. Cross, Administrative Law Judge:

I SUMMARY OF PROCEEDINGS

   On March 22, 1990, the FDIC issued a Notice of Charges and of Hearing ("Notice") against Mansfield Bank & Trust Company, Mansfield, LA ("Bank"), an insured state nonmember bank, pursuant to the provisions of section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b) and the FDIC's Rules of Practice and Procedures, 12 C.F.R. Part 308. The Notice charged that the Bank and its board of directors engaged in specified unsafe or unsound practices within the meaning of section 8(b) of the Act in conducting the business of the Bank. The Notice also provided for a hearing to take evidence on the charges alleged in the Notice and to determine whether an appropriate Order to Cease and Desist ("Order") should be issued under section 8(b) of the Act. The Order proposed by the FDIC would require the Bank to cease and desist from asserted unsafe or unsound practices and require the Bank to take affirmative action to correct the conditions resulting from such practices. The Bank filed an Answer to the Notice ("Answer") on April 13, 1990 in which the Bank generally denied the allegations of unsafe or unsound banking practices contained in the Notice.
   The administrative hearing before me commenced on August 28, 1990 in New Orleans, LA and concluded on August 30, 1990. Prior to the commencement of the hearing, the parties entered into Joint Stipulations (hereinafter referred to as "J.S.") which were submitted into the record. I make the following findings of fact and conclusions of law. These findings are amplified by a penultimate discussion, which precedes the order which I enter herein.

II. FINDINGS OF FACT

   1. Mansfield Bank & Trust Company founded in 1947 ("Bank") is a corporation chartered by and doing business under the laws of the State of Louisiana. (J.S. 8)
   2. The Bank has its principal place of business in Mansfield, Louisiana. (J.S. 8)
   3. The Bank is not a member of the Federal Reserve System. (J.S. 8)
   4. The Bank is primarily regulated by the State of Louisiana but has been and is insured by the FDIC. It is subject to the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §§ 1817–1831, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Louisiana. (J.S. 9)
   5. The FDIC has jurisdiction over the Bank and the subject matter of this proceeding. (J.S. 10)
   6. The FDIC conducted an examination of the Bank as of the close of business August 18, 1989. (J.S. 11)
   7. On March 22, 1990, the FDIC issued Notice of Charges and of Hearing in this matter. (J.S. 12)
   8. The State of Louisiana is the primary regulator for state nonmember banks, and as primary regulator conducted an examination of the Bank and issued a Report of Examination in June 1990 after the FDIC Notice was entered in March of the same year. (Tr. 569)
   9. During the course of the prior August 1989 FDIC bank examination, the Bank's assets were evaluated and all loans of the Bank in excess of a certain amount were reviewed. (Tr. 22–23)
   10. The total deposits of the Bank were determined to be $37,237,000 at the time of the prior (August 1989) FDIC examination. (Tr. 33, FDIC Exhibit No. 2)
   11. Relying on the Bank's balance sheet, the August 1989 FDIC Examination found the Bank's total loans to be $23,423,000. (Tr. 33, FDIC Exhibit No. 2)
   12. In the course of the examination, the FDIC adversely classified as "Substandard", loans in the amount of $4,254,000. (Tr. 23, 34, FDIC Exhibit No. 2)
   13. The FDIC examination classified loans in the amount of $287,000 as "Loss". (Tr. 24, 34, FDIC Exhibit No. 2)
   14. The FDIC examination adversely classified $5,930,000 of the Bank's assets. (Tr. 24, FDIC Exhibit No. 2)
   15. The FDIC August 1989 examination adversely classified $4,541,000 of outstanding loans or 19.18% of the Bank's loan portfolio. (Tr. 33–34, FDIC Exhibit No. 2)
{{6-30-91 p.A-1709}}
   16. The adversely classified assets comprised 14.63% of the Bank's total assets. (Tr. 40, FDIC Exhibit No. 2)
   17. The ratio of adversely classified loans to total loans demonstrates the percentage of the Bank's loan portfolio which carries a risk of loss. In this case, the percentage which carries a risk of loss is high in relation to the total loan portfolio. (Tr. 37)
   18. The Bank's other real estate portfolio, which consisted of property that it had foreclosed upon but has been unable to convert into earning assets, was reviewed by the FDIC examiners and classified as follows: $1,216,000 of the assets as "Substandard" and $14,000 of the assets as "Loss". (Tr. 35–36, FDIC Exhibit No. 2)
   19. At the 1989 FDIC examination, the Bank's adversely classified assets to total equity capital and reserves ratio was 198.59 percent of approximately twice the amount of the Bank's capital. (Tr. 39, FDIC Exhibit No. 2)
   20. The ratio of adversely classified assets to total assets measures the percentage of the Bank's assets carrying a degree of risk. (Tr. 40)
   21. Part 325 total assets as provided by FDIC Rules and Regulations Part 325, 12 C.F.R. § 325, is the average assets of the latest Report of Condition and Income plus the valuation reserves minus the assets classified loss. At the FDIC examination, the Bank's Part 325 total assets were $40,566,000. (Tr. 43–44, FDIC Exhibit No. 2)
   22. When adjusted for the assets classified as "Doubtful", by subtracting 50 percent of the assets classified "Doubtful", the Bank's adjusted Part 325 total assets were $40,557,000 at the FDIC examination. (Tr. 44, FDIC Exhibit No. 2)
   23. As of the FDIC examination, the Bank's adjusted primary capital to Part 325 total assets ratio was 6.58 percent, which in the circumstances presented is insufficient capital to protect against risk or loss. (Tr. 44, FDIC Exhibit No. 2)
   24. As of the 1989 FDIC examination, the Bank had positive earnings, but not for the past several years. The Bank overstated positive earnings by inadequately providing for loan loss in its loan valuation reserve. (Tr. 45)
   25. As of the FDIC examination, the Bank's loan valuation reserve, which is intended to protect the Bank from losses in its loan portfolio, was $449,000. (Tr. 46–47, FDIC Exhibit No. 2)
   26. This reserve is inadequate in that $287,000 in loans were classified "Loss" by the FDIC, leaving the Bank only $162,000 in its loan loss reserve to cover potential losses inherent in its loan portfolio. (Tr. 47, FDIC Exhibit No. 2)
   27. The primary cause of the Bank's high volume of loan loss, negative earnings and need for larger loan loss valuation reserve is the Bank's prior practices. (Tr. 28–31, 46)
   28. Management's loan practices resulted in loans without complete or current financial information, inadequately secured credits, extensions of credit without an identifiable source of repayment, renewing and refinancing credit without an improvement in the Bank's collateral position, and basically a failure to react to a declining Louisiana economy. These practices also contributed to the loss and potential for loss at the Bank. (Tr. 27, 29, 30, 31, 48)
   29. Examples of the Bank's loans which were inadequately secured are: * * *, * * * and * * *. (Tr. 27, FDIC Exhibit No. 2)
   30. Examples of the Bank's loans which reflect the extending of credit without current and complete financial information include: * * *, * * *, * * * and * * *. (Tr. 29–30, FDIC Exhibit No. 2)
   31. Examples of the Bank's loans which reflect the extending of credit without established sources of repayment include: * * *, * * *, * * *, * * * and * * *. (Tr. 30–31, FDIC Exhibit No. 2)
   32. Examples of the Bank's loans which reflect the refinancing or renewing of credit without improving the Bank's collateral position include: * * *, * * * and * * *. (Tr. 33, FDIC Exhibit No. 2)
   33. The 1989 FDIC examination rated the Bank a composite "4", indicating that it has serious financial weaknesses and major problems and is engaging in or has engaged in unsafe or unsound practices which, if left uncorrected, pose significant risk to the deposit insurance fund. (Tr. 50, FDIC Exhibit No. 2)
   34. As part of the FDIC's process of review, preliminary Reports of Examination are sent to a regional office and decisions are made at the regional office concerning {{6-30-91 p.A-1710}}potential actions to be taken based upon the information contained in the Report of Examination. (Tr. 214–219)
   35. Based upon the contents of the preliminary Report of Examination, the review examiner concluded that the Bank was a financial institution with severe problems and an extreme risk to the insurance fund. (Tr. 211)
   36. It is FDIC's policy to issue orders under Section 8 of the Act to banks with composite ratings of 4 or 5, unless there are mitigating circumstances. In the case of this Bank, there are unfortunate circumstances created by prior management but these alone are insufficient to avoid issuance of an order. (Tr. 224–225)
   37. The FDIC's purpose in seeking an order to cease and desist is to rehabilitate the Bank by providing an enforceable operating plan that would place it on the road toward becoming a safe and sound institution. (Tr. 225, 228)
   38. In addition to the increased capital it is important to prohibit the payment of dividends because the Bank is operating at a deficit. (Tr. 231, 244)
   39. The Bank requires a near-term capital ratio of 7.5% to protect itself from the losses presaged by impending losses from classified assets and deficit earnings. (Tr. 235)
   40. The Bank needs to establish a written profit plan, within the minimum requirements set forth in the Order sought by the FDIC. (Tr. 236)
   41. The Bank must discount classified loans on a timely basis. In this instance, implementation of a classified asset reduction schedule is required. (Tr. 237–238)
   42. The Bank should be precluded from making new loans to borrowers whose loans are charged-off or classified as "Loss" and steps should be taken before credit is extended to a borrower with a loan classified in the Report of Examination. (Tr. 239)
   43. The classified situations entered into by the Bank require the Bank to adhere to paragraphs 5(b) and (c) of the FDIC proposed Order to insure that the Bank returns to safe and sound loan administration practices. (Tr. 239–240)
   44. A provision in the proposed order requiring the Bank to maintain an adequate reserve against loan losses is intended to address a small and inadequate loss reserve. (Tr. 241–242)
   45. The bank needs to revise its funds management and liquidity policy and procedures in order to adequately protect the Bank from unforeseen operating liquidity fluctuations which normally occur in banks. (Tr. 243)
   46. The quarterly reporting requirements in the proposed Order are an important monitoring tool for the FDIC and allow the Bank to focus on compliance problems it may have with the Order. (Tr. 245)
   47. Paragraph 2 concerning the capital provisions, paragraph 10 concerning dividends, and the adverse classification paragraph of the Memorandum of Understanding between the Bank and the State of Louisiana were the most important provisions of the MOU with respect to the Bank's rehabilitation to a safe and sound condition. The Bank was not in compliance with these paragraphs. (Tr. 298–299)
   48. The State report is correct in stating that composite "4" rated banks such as this Bank require supervisory attention and financial surveillance. (Tr. 300)
   49. Mr. William Dorroh, President and member of the Bank's Board of Directors, testifies on the Bank's behalf.
   50. Mr. Dorroh testifies that he mostly agrees with the loan classifications. He vehemently disagrees with five of the loans classified by the FDIC. (Tr. 414)
   51. The Bank's watch list includes every loan over $50,000 and also every loan of concern whatever the amount. The total number of loans on the watch list is approximately 120, including the five loans whose classifications are especially disputed by Mr. Dorroh. (Tr. 362, 132)
   52. Mr. Dorroh testifies that loans extended by his presidential predecessor constituted a large volume of poor quality loans. The Bank, was not under a Memorandum of Understanding or Cease and Desist Order at the time. (Tr. 414)
   53. The Bank did not have a loan committee ten years ago. There was little regulatory enforcement. At the time, collateral based lending was common. (Tr. 409)
   54. In December, 1988, * * * submitted an examination of the Bank's loan portfolio to the Board of Directors. Among the statements in the report are the following:

    Taking all things into consideration, the condition of Mansfield Bank & Trust's portfolio is rated as unsatisfactory. De- {{6-30-91 p.A-1711}}spite over $800M being charged-off in 1988 the bank still has a high percentage of doubtful classifications. Additionally, the substandard classifications are very high. Mansfield Bank has many credits that will require close attention to minimize the bank's loss exposure. (Tr. 435–436)
    Even disregarding the above large credits, the classification totals still remain high. The remaining classifications are a result of many small and medium size classified credits. (Tr. 436)
    However, the current economic state does not appear to be the primary cause for the bank's high classification levels. (Tr. 437)
    It is my opinion, the high classification percentages are a result of the bank's underwriting practices. In the past, Mansfield Bank & Trust has relied on collateral values and their previous credit experience with the customer as the primary factors in processing loan requests. On almost all classified credits, there is no evidence that an analysis (obtaining credit reports on applications) was done to determine the customer's debt service ability. This underwriting deficiency has resulted in a loan portfolio that contains an excessive number of accounts where the customer is unable to service their debts in a satisfactory manner. This in turn has resulted in very high past due percentages and charge-off ratios exceeding peer group averages. (Tr. 437, 439–440)
    The Bank has been sending collection letters over the years and many credit files contain numerous letters. It does not appear these letters are effective. In my opinion the bank needs to re-examine their collection procedures and the loan officers need to make more verbal contacts at an earlier stage of the delinquency. (Tr. 440)
   55. Mr. Dorroh testifies that the Bank attempts to get updated loan documentation sufficient to satisfy regulatory requirements and those of its customers. (Tr. 334, 449–457)
   56. Mr. Dorroh testifies that the Bank's trend in the return of overdue loans and leases versus gross loans and leases is improving. (Tr. 453)
   57. Members of the board of directors testify that mostly they were not in disagreement with many aspects of the proposed cease and desist order. They object to criticism of present management and the board of directors. (Tr. 482, 497)
   58. In testimony concerning a State of Louisiana Report of Examination issued June 5, 1990 after the Notice of Charges, State Bank official Linda Drake reiterates the excessive volume of adverse classifications and the volume of poor quality assets held by the Bank. (Tr. 583)
   59. The State of Louisiana Office of Financial Institutions previously entered into a Memorandum of Understanding with the Bank effective June 13, 1989. The State reserves the use of Memoranda of Understanding for problem banks. These memoranda are not enforceable by the State as they do not contain any enforcement mechanism or procedure. (Tr. 581–582) This June 1989 MOU was entered prior to the FDIC examination in August 1989.
   60. The subsequent State findings concerning the excessive volume of adversely classified assets is consistent with the 1989 findings of the FDIC examination. (Tr. 167)
   61. The 1990 State Report finds the Bank to have insufficient capital in relationship to the kind and quality of assets held by the Bank. (Tr. 582)
   62. The State of Louisiana's June 1990 findings concerning the insufficiency of the Bank's capital also is consistent with the 1989 findings of the FDIC examination. (Tr. 167–168)
   63. The State rates the Bank a composite "4" and as a result keeps it on the State's problem bank list. Banks with a composite "4" rating have an inordinate volume of asset weaknesses or combinations of other conditions that are unsatisfactory. (Tr. 586)
   64. The State of Louisiana's 1990 composite rating and its basis for the Bank receiving such a rating is consistent with the 1989 findings of the FDIC's report of examination.
   65. The bank as noted is located in the city of Mansfield, the parish seat of DeSoto Parish. The town has a population of approximately 5,700 people. This community of 5,700 is served by six financial institutions; Mansfield Bank and trust Company, First National Bank in Mansfield, People's State Bank, Progressive National Bank of DeSoto Parish, DeSoto Federal Savings and {{6-30-91 p.A-1712}}Loan and Carter Credit Union. (Page 2 of Respondent's Post-Hearing Brief)
   66. Mansfield and DeSoto Parish have been particularly hard hit in the prior Louisiana gas and oil set-back. In addition to external economic difficulties, the bank was severely crippled by fraudulent loans made by a former president, * * *. Mr. * * * was responsible for approximately $2.5 million in losses suffered by Mansfield Bank and Trust Company from 1982 to date. After discovery of the internal bank fraud, the Bank's directors raised $2 million to recapitalize the bank. In conjunction with this recapitalization, Mansfield Bancshares, Inc., a one bank holding company, was formed holding 100 percent of the stock of Mansfield Bank and Trust Company.
   67. The Bank has struggled with the downturn of the oil industry in Louisiana, problems in its important timber industry, high local unemployment and a local decrease in real estate values of at least 50 percent from 1984 forward. (Ib. P's. 2 and 3)
   68. In August 1989 as noted, Mansfield Bank was examined by the FDIC, Based upon the results of the examination, the examiner in charge recommended continuance of the outstanding State Memorandum of Understanding. The review office decided, however, that a Section 8(b) enforcement action was necessary. (Ib. P's. 3 and 4)
   69. The Cease and Desist Order proposed by the FDIC carries with it a penalty of mandatory publication. As noted above, Mansfield is a small and apparently overbanked community. Management and the directors assert that publication of such an Order would have a disastrous competitive effect on Mansfield Bank and Trust Company. (Ib. P's. 3 and 4) There is no reason to doubt that there would be a material adverse effect on the Bank but the full extent of this, whether severe or moderate cannot be fixed on this record. (This deductive conclusion, is mine and is based on the one hand, on the unrebutted testimony of Bank officials; and on the other, the absence of a marketing study by the Bank or its officials.)
   70. On March 19, 1990, the Office of Financial Institutions for the State of Louisiana, as noted, commenced an examination of Mansfield Bank and Trust Company as of March 16, 1990. This examination concluded on March 30, 1990. In a report of examination, dated June 5, 1990, State classified-assets reduced to $4,472 million, an opined improvement of approximately $1.5 million over the opined FDIC examination results of August 1989. The bank's capital had only slightly increased from 6.60 percent to 6.62 percent. However, adversely classified assets as a percentage of total capital had decreased to 158.08 percent. Bank's reserve for loan losses had been increased from $400,000 to $703,000, and delinquent loans had decreased from 6 to 4 percent. (Ib. P. 4)
   71. The Office of Financial Institutions for the State of Louisiana finds the bank to be in substantial compliance with its Memorandum of Understanding and supports continuance of that memorandum. The State of Louisiana does not support the FDIC in its position that more stringent enforcement action is necessary, but except for the noted improvements in Bank conditions, the June 1990 State examination report and the earlier FDIC examination are significantly the same. (Ib. P. 4 and 5; and Findings of Fact 47-48-57-58)
   72. There are no allegations of insider abuse except during the term of the prior president of the Bank against the management, directors or shareholders of Mansfield Bank and Trust Company. (Finding of Fact 68).
   73. As of March 16, 1990, the Bank's capital to assets ratio stood at 6.62 percent (P. 25 of Respondent's Post-Hearing Brief) as compared to 6.60 percent as of August 18, 1989 (P. 24 of Respondent's Post-Hearing Brief)

III. CONCLUSIONS OF LAW

   1. The FDIC has jurisdiction over, and authority to issue an Order to Cease and Desist against the Bank under section 8(b) of the Act.
   2. The Bank has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act by engaging in hazardous lending and lax collection practices as evidenced by the Bank's extending credit to borrowers for loans which are inadequately secured, extending credit or renewing loans to borrowers without complete or current financial information, and by refinancing credits to borrowers without improving collateral margins, operating with an excessive level of adversely classified assets in relation to the total equity capital and reserves of the Bank, and operating with an {{6-30-91 p.A-1713}}excessive volume of adversely classified and nonaccrual loans.
   3. The Bank has engaged in an unsafe or unsound practice within the meaning of section 8(b) of the Act by operating with a large volume of poor quality assets.
   4. The Bank has engaged in an unsafe or unsound practice within the meaning of section 8(b) of the Act by operating with an inadequate amount of primary capital.
   5. The Bank has engaged in an unsafe or unsound practice within the meaning of section 8(b) of the Act by operating in such a manner as to produce operating losses.
   6. The Bank has engaged in an unsafe or unsound practice within the meaning of section 8(b) of the Act by operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits.
   7. The Bank has engaged in an unsafe or unsound practice within the meaning of section 8(b) of the Act by operating with a board of directors which has failed to provide adequate or effective supervision over and direction to the active officers and management of the Bank to prevent or abate the unsafe or unsound practices described in paragraphs 2 through 7 above.
   8. The improvement in the condition of the bank and/or the cessation of unsafe or unsound practices does not negate the necessity for the issuance of a cease and desist order.
   9. The Report of Examination of the State of Louisiana Office of Financial Institutions was prepared after the date of the Notice of Charges, contains opinions about the Bank composed after the date of the Notice of Charges and therefore is not admissible in that important respect pursuant to 12 C.F.R. § 308.38(a)(2). Since a cease and desist order is deemed necessary, the State's Report of Examination essentially is utilized for purposes of fashioning the actual order, pursuant to 12 C.F.R. § 308.38(a)(3).

IV. DISCUSSION AND CONCLUSIONS

   A. The Bank Has Engaged In Unsafe Or
Unsound Practices

   The term "unsafe or unsound practice" is not defined in the Act as such nor are there any indications in the Act concerning which practices are deemed to be "unsafe or unsound practices" within the meaning of section 8 of the Act, 12 U.S.C. § 1818. However, the term "unsafe or unsound practices" has been defined by the Board of Directors of the FDIC as a generic term with an application that must be adapted to constantly changing factual circumstances. An unsafe or unsound practice is any action, or lack of action, that is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk of loss or damage to an institution, its shareholders, or the agencies administering the insurance funds. Hoffman v. FDIC, Case No. 89-70466 (9th Cir. Aug. 31, 1990); FDIC-83-172b, 1 P-H FDIC Enf. Dec. ¶5030 (1984). As this definition indicates, the determination as to whether a particular practice constitutes an unsafe or unsound practice is a factual matter to be determined by the record of the specific administrative hearing.
   This definition is consistent with the definition of "unsafe or unsound practice" that has been developed by the other banking regulatory agencies. In First National Bank of Eden v. Department of the Treasury, 568 F.2d 610 (8th Cir. 1978), the court approved the definition of "unsafe or unsound" utilized by the Comptroller of the Currency stating:

    Congress did not define unsafe and unsound banking practices in § 1818(b). However, the Comptroller [of the Currency] suggests that these terms encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk of loss to a banking institution or shareholder. The practices must be analyzed in light of all relevant factors:
      [W]hat may be an acceptable practice for an institution with a strong reserve position, such as concentration in higher risk lending, may well be unsafe or unsound for a marginal operation.
    Financial Institutions Supervisory and Insurance Act of 1966: Hearings on S. 3158 Before the House Comm. on Banking and Currency, 89th Cong., 2d Sess. 49–50 (1966). Id. at 611 n.2.
The definition of "unsafe or unsound" as utilized by the Comptroller of the Currency was also accorded deference in First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 685 (5th Cir. 1983); {{6-30-91 p.A-1714}}First National Bank of La Marque v. Smith, 610 F.2d 1258 (5th Cir. 1980). See also, In re Franklin National Bank Securities Litigation, 478 F.Supp. 210 (E.D.N.Y. 1979). In a case involving a savings and loan association, the Fifth Circuit held that an unsafe or unsound practice is a practice that has a reasonably direct effect on an association's financial soundness. Gulf Federal Savings & Loan Association v. Federal Home Loan Bank Board, 651 F.2d 259, 264 (5th Cir. 1981).
   Judicial review of bank regulatory action under section 8(b) of the Act has been to defer to the expertise of the bank regulatory agencies in defining what constitutes an unsafe or unsound practice, limited review to a determination of whether the action taken by the regulatory agency was arbitrary, capricious, or otherwise unsupported by substantial evidence. The Fifth Circuit in Groos National Bank v. Comptroller of the Currency, 573 F.2d 889, 897 (5th Cir. 1978) noted:
    The phrase "unsafe or unsound banking practice" is widely used in the regulatory statutes and in case law, and one of the purposes of the banking acts is clearly to commit the progressive definition and eradication of such practices to the expertise of the appropriate agencies.
   The Eighth circuit in the First National Bank of Eden, 568 F.2d at 611, also deferred to the expertise of the Comptroller of the Currency and held that if substantial evidence supported the agency determination, the finding would stand. The District of Columbia Circuit in Independent Bankers Association of America v. Heimann, 613 F.2d 1164 (D.C. Cir. 1979), considered whether the Comptroller could statutorily define a particular "unsound or unsafe" practice. The Comptroller's challenged regulation prevented national bank insiders from receiving commissions for credit life insurance sold to the bank's borrowers. In upholding the regulation, the court stated that the agencies' discretionary authority to define and eliminate unsafe or unsound practices is to be "liberally construed." Id. at 1169.
   In A.G. Becker v. Board of Governors of the Federal Reserve System, 693 F.2d 136 (D.C. Cir. 1982), cert. granted sub nom. Securities Industry Association v. Board of Governors of the Federal Reserve System, 464 U.S. 812 (1983), the court held that the Federal Reserve Board's interpretation of a statute it administered was entitled to even greater than usual weight because, inter alia, it was "responsible to bring enforcement actions to prevent member banks from engaging in `unsafe and unsound' banking practices"; and "the agency's decision applie[d] general, undefined statutory terms ... to particular facts.... [S]uch statutory drafting `leave[s] the agency with the task of evolving definitions on a case-by-case basis.'" A.G. Becker, 693 F.2d at 140–141 (quoting Puerto Rico v. Blumenthal, 642 F.2d 622, 635 (D.C. Cir. 1980), cert. denied sub nom. Virgin Islands v. Regan, 451 U.S. 983 (1981)).
   In Bank of Dixie v. FDIC, 766 F.2d 175 (5th Cir. 1985), the court held that the record properly supported FDIC's findings that loans were extended that were inadequately secured, and that hazardous lending and loan collection procedures caused an excessive volume of poor quality assets in relation to total equity capital reserves and an excessive volume of overdue loans in relation to gross loans, all of which constituted unsafe or unsound banking practices. In the same year, the Sixth Circuit deferred to the administrative law judge's findings that failing to establish and enforce realistic programs for the repayment of loans, extending credit that is inadequately secured, extending credit without complete and current credit information, failing to make provisions for an adequate loan loss reserve, and operating with inadequate liquidity were unsafe or unsound practices. First State Bank of Wayne County v. FDIC, 770 F.2d 81 (6th Cir. 1985).
   With respect to both capital and the volume of quality assets, the FDIC correctly takes the position that a Bank is engaged in an unsafe or unsound practice when adversely classified assets are approximately two times that of the bank's unimpaired capital and reserves. In the instant action, the adversely classified assets also amount to approximately two times that of the Bank's unimpaired capital and reserves. However, almost all of the classified assets are merely substandard and mostly are collectable.
   Finally with special reference to the adequacy of the loss reserve, the legislative history of section 8(b) of the Act, 12 U.S.C. § 1818(b), indicates that failure to make adequate transfers to reserves for absorbing losses is an unsafe or unsound practice. Financial Institutions Supervisory and Insur- {{6-30-91 p.A-1715}}ance Act of 1966: Hearings on S. 3158 Before the House Comm. on Banking and Currency, 89th Cong. 2d Sess. 49–50 (1966). In general, the purpose of the loan valuation reserve is to reveal the actual condition of the loan portfolio of the Bank, FDIC-85-42b, 2 P-H FDIC Enf. Dec. ¶5062 (1986). In the event that the reserve is understated or not adequately maintained, the resulting effect is to overstate earnings. One relevant factor to consider in determining whether the financial institution is maintaining an adequate reserve is through the opinion of the Federal bank examiners who have completed a thorough examination of the financial institution. In this instance, the testimony of the Federal bank examiner is that the loan loss reserve is inadequate and that this inadequacy results in overstated earnings. This practice is contrary to generally accepted standards of prudent operation that would result in abnormal risk of loss or damage to the financial institution and constitutes an unsafe or unsound practice.
   In this instance, the record supports a conclusion that the large volume of poor quality loans and assets, inadequate loan reserves and inadequate capital of the Bank involve abnormal risk of loss or damage to the institution, its shareholders, or the agencies administering the insurance fund. These practices fall within those practices identified in the legislative history or administrative or judicial construction of section 8(b) of the Act.

   B. FDIC Examiners Are Entitled To
Deference In Evaluating The Safety and
Soundness Of A Financial Institution

   For purposes of evaluating the safety and soundness of a given bank, FDIC examiners are expert witnesses due to their possession of a unique expertise. The examiner receives extensive classroom and on the job training and must undergo a lengthy and structured apprenticeship prior to any consideration to becoming a commissioned bank examiner. A bank examiner's findings, opinions and determinations are entitled to deference because of the expertise that examiners possess. With such deference, it has been held generally an examiner's opinions or findings cannot be overturned unless shown to be arbitrary and capricious or outside a "zone of reasonableness." Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986). The court in Sunshine adopted in whole a statement by the FDIC Board of Directors on the deference that must be given to bank examiners. The opinion states:

    Although there are no court opinions addressing the weight to be given examiners' loan classification, the Board's inquiry on this point is guided by several decisions addressing agency functions which require similar exercises of expert judgment and informed discretion. The courts have uniformly recognized that certain types of agency judgments are not susceptible to strict "proof" because they involve the exercise of discretion, technical expertise and informed prediction about the likely course of future events. One court's explanation of the deference accorded such judgments is equally applicable to the judgments made by FDIC commissioned bank examiners in assigning loan classifications:
    [T]he Commission's projection of carrier economic conditions three years into the future is a kind of agency function that the Supreme Court has recognized to be primarily a question of probabilities, and thus peculiarly subject to the expert experience, discretion, and judgment of the Commission. In making a predictive judgment, the expertise of the Commission supplements, and may supplant, the projections placed in the records by the parties ... to hold otherwise would paralyze agencies merely because the future is not subject to proof. While an agency cannot make a projection that is without any reasonable basis, the role of substantial evidence is greatly diminished. MissouriKansas-Texas Railroad Co. v. United States, 632 F.2d 392, 406 (5th Cir. 1980) (emphasis added) (citations omitted). The United States Supreme Court has also consistently recognized the deference which should be afforded to judgments and predictions made by an agency within its area of special expertise. See, e.g., Baltimore Gas & Electric Co. v. Natural Resources Defense Council, Inc., 462 U.S. 87, 103 S. Ct. 2046, 2256, 76 L.Ed.2d 437 (1983): Federal Communications Commission v. National Citizens Committee for Broadcasting, 436 U.S. 775, 813-14, 98 S.Ct. 2096, 2121, 56 L.Ed.2d 697 (1978).
    Congress has instructed this Board to "appoint examiners", and has provided that "[e]ach examiner shall have power to {{6-30-91 p.A-1716}}make a thorough examination of all of the affairs of the bank and its affiliates, and shall make a full and detailed report of the condition of the bank to the Corporation." 12 U.S.C. § 1820(b). After extensive training, lengthy apprenticeship and careful evaluation, FDIC examiner's are appointed as "commissioned examiner", and thereby vested with authority to make informed predictions about the risk inherent in a bank's assets. This exercise of informed judgment on the part of commissioned examiners is entitled to deference, and should not be disregarded in the absence of compelling evidence that it is without rational basis.
    The Board does not, of course, mean to suggest that the examiners conclusions are unreviewable. Despite their extensive training and experience, commissioned examiners are by no means infallible, and it is both necessary and appropriate that their classifications be subject to some degree of scrutiny. However, the appropriate degree of scrutiny will vary depending upon whether the ALJ is reviewing strict factual findings or discretionary decisions requiring the exercise of informed judgment.
    Asset classifications are based upon objectively verifiable facts. For example, an examiner might find that a loan has been delinquent for six months; that collateral for the loan is a certain parcel of land; and that the borrower's annual salary is $30,000. Because each of these conclusions consists of objectively verifiable facts requiring no particular training or expertise, the ALJ as fact finder is entitled to reach his own de novo conclusions as to the correctness of these underlying factual findings.
    After ascertaining the relevant facts, the examiner then applies his expertise and training to those facts to reach certain conclusions about the likelihood of a particular loan being repaid. It is with respect to this second step, where certain expert inferences and judgments are made, that the ALJ is required to defer to the examiner's expertise in reviewing the examiner's classification conclusions. The ALJ may not substitute his own subjective judgment for that of the examiner, but may set aside the classification if it is without objective factual basis or is shown to be arbitrary and capricious. The board finds that in many cases the ALJ failed to meet either of these tests.
   In accordance with the case law, the Bank, absent opposing expert evidence, must show that the "expert" opinions of the FDIC Examiners testifying at hearing are arbitrary and capricious or outside a "zone of reasonableness". In this instance, the Bank has failed to meet this burden. The examiners' determinations are upheld.

   C. The Bank's Board Of Directors Failed
To Adequately Supervise and Direct Its
Officers

   Bank directors have a duty to direct the affairs of the Bank. Generally, directors of Banks are held to a standard of ordinary care and prudence in the administration of bank affairs. Briggs v. Spaulding, 141 U.S. 132, (1891). A board of directors at financial institutions is entitled to delegate banking business to duly authorized officers, but may be held liable for failure to exercise reasonable supervision over management. Fitzpatrick v. FDIC, 765 F.2d 569 (6th Cir. 1985); Without question a board of directors must exercise ordinary or reasonable care in supervision of the bank's officers. The directors must discharge their duty to select an operating officer, diligently attend director's meetings, meet informally to discuss the bank's business, select competent auditors, review their work and make inquiry as to the condition of the bank.
   Beyond the foregoing, a board of directors of a bank has a duty to investigate where necessary to protect shareholders' interests, to supervise the bank's affairs, to have a general knowledge of its business, and to know to whom and upon what security its large lines of credit are given. FDIC-83-172b, 1 P-H Eng. Dec. ¶5030, p. 5657. See also DePinto v. Provident Security Life Insurance Company, 374 F.2d 37, 46 (9th Cir.), cert. denied, 389 U.S. 822 (1967).
   In the instant action, the former president cheated the Bank. (Tr. 315–318) This prior experience should have alerted the Board to be particularly mindful of signs concerning the safety and soundness of the Bank. Prior to August of 1989, the FDIC, the State of Louisiana, and the Bank's own consultant placed the directors on specific notice that the Bank's policies were placing the financial institution in a position of experiencing negative earnings, undergoing deterioration of its assets and possessing a loan portfolio {{6-30-91 p.A-1717}}that is deemed unsatisfactory. (Tr. 212–220, 387, 435–440)
   The Board and the Bank's management earlier should have undertaken an active interest in the Bank's deteriorating condition. The Bank's own consultant in December of 1988 concluded that the Bank's loan portfolio was unsatisfactory and required immediate attention to correct its problems (Tr. 435–436, FDIC Exhibit No. 9). The lack of adequate affirmative action on the part of the Bank's board to correct the criticisms indicates the board's partial failure to accept their responsibilities under the circumstances.1 The loan losses suffered by the Bank and the very poor quality of its overall loan portfolio as of August 1989 indicate that the board's duties had not been satisfied fully. Under these circumstances, the record in this matter establishes that the Bank's board failed to fully supervise its management officials to prevent the unsafe or unsound practices and conditions disclosed at the hearing and contained in the Report of Examination (FDIC Exhibit No. 2).

D. Cessation Of Unsafe Or Unsound
Practices Or Improvement In The Bank's
Condition Is Not A Defense To The
Proceeding

   Section 8(b) of the Act provides, in pertinent part, that a cease and desist order may be issued against any bank director or officer who "is engaging or has engaged" in an unsafe or unsound practice [emphasis added]. Section 8(b), in fact, encompasses unsafe or unsound practices which are ongoing at the time of the issuance of the order as well as those unsafe or unsound practices that have already occurred. This indicates that a cease and desist order may be issued even though there may not be an unsafe or unsound practice occurring at the moment of the issuance of the cease and desist order. See FDIC-85-42b, 2 P-H Enf. Dec. ¶5062, p. 6503.
   In First State Bank of Wayne County v. FDIC, 770 F.2d 81 (6th Cir. 1985), the United States Court of Appeals for the Sixth Circuit held that a cease and desist order issued by the FDIC requiring a bank to cease and desist from engaging in unsafe or unsound practices (i.e., extending unsecured credit that was not adequately secured, failing to establish and enforce programs for repayment of loans, extending secured credit without obtaining complete supporting documentation, failing to provide adequate reserves for loan losses, and operating with an inadequate level of capital for its assets) was warranted even assuming the bank had improved its loan policy because the cease and desist order would prevent future unsafe practices, and the cessation of activities was directly related to an examination undertaken by the FDIC. This position is consistent with other circuits that have also held that the voluntary cessation of a prohibited practices is not sufficient to prevent the issuance of a cease and desist order under 12 U.S.C. § 1818(b). See First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 681–683 (5th Cir. 1983); Bank of Dixie v. Federal Deposit Insurance Corporation, 776 F.2d 175 (5th Cir. 1985). See also Citizens State Bank of Marshfield, Missouri v. FDIC, 751 F.2d 209, 215 (8th Cir. 1984); Del Junco v. Conover, 682 F.2d 1338, 1340 (9th Cir. 1982), cert. denied, 459 U.S. 1146 (1983).
   The utilization of administrative injunctive power for purposes of achieving a cessation of offensive practices has also been upheld by courts with respect to other federal agencies with injunctive powers similar to that possessed by the FDIC. In Zale Corporation and Corrigan-Republic, Inc. v. Federal Trade Commission, 473 F.2d 1317 (5th Cir. 1973), the court recognized that an administrative cease and desist order was not only designed as a tool to stop incorrect practices, but also served to deter and prevent unsafe practices. The court, in dismissing a motion to enjoin the issuance of the order, stated:

       Whether or not such practices have actually been abandoned can only be deter-
    1 The Bank, Bank management and the Bank's Board must be given credit for hiring a consultant to help the Bank. The Bank consultant's report of December 1988 (FDIC Exhibit No. 9) indicates many of the same criticisms of the Bank that were testified to by Ms. Caldwell (the FDIC examiner) and that were contained in her Report of Examination (FDIC Exhibit No. 2). Some of these criticisms include poor underwriting practices, lack of analyses of a customer's debt service ability, high past due percentages, high charge-off ratios, ineffective collection practices and procedures, inadequate loan loss reserve, inadequate procedures in the collateral department, lack of pertinent information concerning the financial capacity of the borrower, lack of other pertinent information in the Bank's credit files (e.g. purpose of the loan, terms and source of repayment, and collateral values), and procedural difficulties resulting in unnecessary credit exposure.
    {{6-30-91 p.A-1718}}mined through subsequent enforcement procedures. Hence there is no valid assurance that if Zale were free of the Commission's restraint it would not continue its former course. (Id. at 1320).
   This concept was recognized in Montgomery Ward & Co. v. Federal Trade Commission, 379 F.2d 666 (7th Cir. 1967), where the court stated that "voluntary discontinuance of a practice does not prohibit issuance of a cease and desist order, which operates prospectively." Id. at 672. Furthermore, where an illegal trade practice is once proved against an enterprise and is capable of being perpetuated or resumed, it may be presumed to have been continuing, and an order may issue to prevent, even upon a showing that it has been discontinued or abandoned. R.F. Collins & Son Corporation v. FTC, 427 F.2d 261, 275 (6th Cir), cert. denied, 400 U.S. 926 (1970).
   In a deceptive advertising case, Beneficial Corp. v. Federal Trade Commission, 542 F.2d 611 (3rd Cir. 1976), cert. denied, 430 U.S. 983 (1977), the court affirmed the power of the Federal Trade Commission to issue a cease and desist order notwithstanding discontinuance that occurred prior to agency action:
    It [petitioner] contends, however, that because the early text was soon abandoned with no prompting from the Commission, the finding cannot support a cease and desist order. But this and other courts have held that at least the practice may be the subject of a cease and desist order. (Id. at 617; emphasis added).
   Decisions interpreting the cease and desist powers of the National Labor Relations Board have resulted in similar outcomes. In Lakeland Bus Lines, Inc. v. NLRB, 278 F.2d 888 (3rd Cir. 1960), the NLRB concluded that unfair labor practices were being committed by Lakeland and sought to issue a cease and desist order. Lakeland contended that since it had discontinued the practices in issue, there was no longer a basis for the issuance of an order. The Lakeland court dismissed the argument, stating:
    Authority thoroughly establishes that compliance itself is not sufficient to deprive the Board of its right to secure enforcement to make sure that repetition of the unfair labor practices does not occur in the future. (Id. at 891-92; emphasis added).
   Furthermore, present compliance does not preclude the issuance of a cease and desist order, NLRB v. General Thermodynamics, Inc., 670 F.2d 719 (7th Cir. 1982); nor does a factual situation in which remedial steps had already been undertaken to alleviate the unlawful activity, NLRB v. Methodist Hospital of Gary, Inc., 733 F.2d 49 (7th Cir. 1984). Also, abandonment of unlawful activity does not negate the enforceability of a cease and desist order. NLRB v. P.I.E. Nationwide, Inc., 894 F.2d 887 (7th Cir. 1990). See also Federal Labor Relations Authority v. U.S. Department of the Air Force, 735 F.2d 1513 (D.C. Cir. 1984), NLRB v. Local 1445, United Food & Commercial Workers Intern. Union, 647 F.2d 214 (1st Cir. 1981).
   In Bank of Dixie v. FDIC, 766 F.2d at 178, the court states that an administrative determination as to the cessation of offensive practices by a bank should be appropriately made through subsequent enforcement proceedings. The fact that evidence of improvements made by the Bank in its operating procedures is present in the record does not negate the necessity for the cease and desist order. Without a cease and desist order, the FDIC has no valid assurance that the Bank would not continue its former course if it were free of FDIC's restraints.
   The foregoing case law and the express statutory language of Section 8(b) of the Act support the proposition that FDIC may issue a cease and desist order based on unsafe or unsound practices as of a given date even if these identified practices have been modified or curtailed. Thus, in this instance, even if the unsafe or unsound practices cited in the Notice had ceased and the condition of the Bank had improved; the FDIC may still be justified in issuing a cease and desist order based on unsafe or unsound practices that existed at the time of the FDIC examination.

E. Use Of The Examination Report Of The
Office Of Financial Institutions Is Only
Permitted For Purposes Of Fashioning A
Remedy Pursuant To 12 C.F.R.
§ 308.38(a)(2)

   Federal Regulations at 12 C.F.R. § 308.38 set forth the manner in which evidence may be heard in an administrative hearing before the FDIC. As a general proposition, evidence of any act or event occurring after the date of the Notice may not be admitted. However, such evidence may be admitted for the express purpose of assisting the Administra- {{6-30-91 p.A-1719}}tive Law Judge in fashioning an order (12 C.F.R. § 308.38(a)(3)).
   In this instance, the Bank seeks the admission of the results of an examination conducted by the State of Louisiana Office of Financial Institutions that was completed after the date of the Notice and contains information on acts and events that occurred before and after that date.
   The document of the State of Louisiana shows the result of its examination of the Bank between March 19, 1990 and March 30, 1990. Even though the commencement of the examination predates the issuance of the Notice of Charges (March 22, 1990), the examination continued until after the issuance of the Notice and Charges and the actual document was not completed until the termination of the examination. The examination mostly evaluates circumstances as of the close of business March 16, 1990. It also contains significant actions that occurred during the examination. Nonetheless, for purposes of this hearing, the State examination report even though it mostly reflects Bank conditions as of March 16, 1990 is essentially a series of State conclusions finally drawn after March 22, 1990. Thus, the examination report is not admissible evidence at this hearing pursuant to 12 C.F.R. § 308.38(a)(2). However, it is discussed infra and in any event basically supports the underlying findings herein although the issuance of a cease and desist order is not recommended by the State.
   The regulation at 12 C.F.R. § 308.38(a)(2) states as follows:

    No evidence concerning any act or event occurring after the date of the Notice shall be deemed relevant or otherwise admissible as to the fact of the violation of law, rule, regulation, and any written agreement entered into with the FDIC, as to the fact of an unsafe or unsound practice, or as to the fact of a breach of fiduciary duty, in any proceeding as set forth in § 308.04.
As indicated, the State report's salient aspect is the expert opinions of findings of examiners reflected in the State examination, which were expressed after the date of the FDIC Notice. I, thus, find that the State examination report is not relevant to the ultimate issue (whether a cease and desist order is appropriate) in this matter. However, the examination report is admissible for purpose of assisting the administrative law judge in fashioning an order pursuant to 12 C.F.R. § 308.38(a)(3).
   As a preamble to the issuance of its revised Rules of Practice and Procedures, the FDIC provided comments and discussion intended to provide the rationale behind its revised rules (53 F.R. 51656 (1988)). The "Analysis and Modification" section of the comments and discussion takes great care to explain that the rule makers considered many dates as the possible date of demarcation, beyond which evidence would be inadmissible. The rule makers state:
    Accordingly the FDIC continues to believe that the most efficient rule to limit the admissibility of evidence is to tie admissibility to the date of the Notice.
    [3] The FDIC also considered at length the question of whether evidence of any act or event occurring after the date of the Notice should be admissible at the hearing. In light of the comments received as well as the statutory requirements of section 8, the FDIC upon careful consideration has determined to modify its rule governing the admissibility of evidence.
       In order to fashion an appropriate remedy for the particular enforcement action involved, the FDIC has determined that evidence subsequent to the date of the Notice may be relevant. Such evidence, however, may be admitted only for the exclusive and limited purpose of assisting in fashioning an appropriate remedy. Accordingly, the administrative law judge must make a finding on the record that such evidence is necessary to fashion a remedy before it can be admitted. What is contemplated by this modification then, is a proceeding where the fact of the Violation and/or Practice must be established first by evidence occurring up to the date of the Notice. Only once the fact of the Violation and/or Practice has been established and the administrative law judge makes a finding to that effect, may the administrative law judge at this point entertain motions for the admission of evidence after a specific finding that the evidence is necessary to fashion a remedy.
   The rule-makers cited a variety of reasons for fashioning the rule in this way, including the belief that such a general presumption of inadmissibility would prevent the record from being cluttered with immaterial and irrelevant evidence. The requirement that the ad- {{6-30-91 p.A-1720}}ministrative law judge make a specific finding that the evidence is necessary to fashion a remedy is intended to insure that the remedy devised addressed an institution's specific problems. Courts are generally hesitant to substitute an alternative reading in place of an agency's reading of its own regulation. Gardebring v. Jenkins, 485 U.S. 415 (1988); and accord deference to the construction of an administrative regulation, when the construction is made by the administrative authority responsible for the regulation. Udall v. Tallman, 380 U.S. 1, 16 (1965); Washington v. Davis, 426 U.S. 229 (1976); Talley v. Matthews, 550 F.2d 911 (4th Cir. 1977), and Guardian Federal Savings & Loan Association v. FSLIC, 589 F.2d 658 (D.C. Cir. 1978).
   Even assuming that the examination report is deemed relevant as to the ultimate issue in this matter, the findings of the examination report of the State of Louisiana indicate that the State regulatory agency generally concurs in March of 1990 with the FDIC exam of August 1989. Specifically, both regulatory agencies found that the Bank has an excessive volume of adversely classified loans, an excessive volume of poor quality loans and other assets in relation to the total assets of the Bank, an excessive volume of adversely classified assets, insufficient capital in relation to the level and quality of assets, an excessive amount of overhead expenses, a poor asset quality that significantly contributed to the Bank's poor earnings, a loan loss reserve that is insufficient for the coming year, an insufficient liquidity and funds management policy and an ultimate rating that indicated an immoderate volume of asset weaknesses or a combination of other conditions that are unsatisfactory (Tr. 583–586).

F. The Effect of Publication Is Relevant In
Determining The Statutory Requirements
Of Section 8(b)

   Section 913 of FIRREA, 12 U.S.C. § 1818(u), requires the FDIC to publish and make available to the public any final order, including modifications or terminations, issued with respect to any administrative enforcement proceeding initiated by the agency. The Congressional mandate and the legislative history of section 913 establishes that Congress wants the agencies to discontinue the virtually uniform policy of maintaining secrecy in enforcement actions. This concern is expressed in Report 101-54, Part 1 of the Committee on Banking, Finance and Urban Affairs:

    Section 913: The bank regulatory agencies, with infrequent exceptions, do not disclose civil enforcement actions. (They are the only Federal regulatory agencies which do not do so.) This policy has been specifically criticized in congressional reports and during congressional hearings. One of the problems in the financial services industry (except for SEC-regulated institutions, which must disclose such enforcement actions) has been the excessive secrecy of agency supervisory actions. Such secrecy does little to deter misconduct but does serve to ultimately worsen the problems of financial institutions. The October 1988 Government Operations Committee report specifically recommended legislation to require the banking agencies to publicly disclose all formal civil enforcement actions and any modifications to or terminations of such orders. The Committee strongly believes that more disclosure of formal enforcement orders will help prevent insider misconduct.
H.R. REP. No. 101-54, 101st Cong., 1st Sess., pt. 1, at 470 (1989).
   The Report of the Committee on Government Operations, referenced in the Report of the Committee on Banking, Finance and Urban Affairs, is even more direct in expressing concern about the secret law of the banking agencies and severely criticizes the agencies' failure to disclose their enforcement actions:
    The banking agencies' refusal to even consider disclosure in more than a minimal number of cases— usually when the respondent openly litigates in a court of law—is unreasonable, demonstrates a bureaucratic inertia, and serves only to ultimately worsen not improve, the problems of the financial institutions regulated. In sum, it is counterproductive to the public interest and to the vast majority of financial institutions who want to obey the law and agency regulations and who want to keep the `bad guys' out of their institutions. (Emphasis supplied.)
HOUSE COMM. ON GOVERNMENT OPERATIONS, H.R. REP. No., 100–1088, 100th Cong., 2nd Sess. 89 (1988).
   Report 100–1088 of the Committee on Government Operations, referenced in the Banking Committee Report, identifies sev- {{6-30-91 p.A-1721}}eral ways in which disclosure of enforcement actions would serve the public interest:
    It would inform the public about the effectiveness of the bank regulatory system. Second, it would alert financial institutions as to what type of conduct would not be tolerated. Third, it would have another salutary deterrent impact by alerting the financial community of problems which have arisen at other institutions and thus enable them to be careful when purchasing loans from those institutions or when hiring persons who caused or participated in abusive practices or misconduct there.
HOUSE COMM. ON GOVERNMENT OPERATIONS, H.R. REP. No. 100–1088, 100th Cong., 2nd Sess. 89 (1988).
   At the hearing, Respondent established that publication of the order would be harmful materially to the institution, although the degree of harm whether more than moderate is not clear. In this regard, Congress provides a limited exception from publication of a cease and desist order. Section 8(u)(2) provides that publication of the order may be delayed for a reasonable period of time if the agency determines in writing that publication poses a threat to the safety and soundness of the institution. It is significant that the statute provides only for a reasonable delay, thereby emphasizing Congress' intent that all final orders by published. Any doubt as to Congress' recognition of the effect of publication is eliminated upon further review of the Report of the Committee on Government Operations:
    Any harmful effects—and there may be some negative impacts on an institution's business, although that can be alleviated if the institution takes quick corrective action—are heavily outweighed by the longterm public interest in knowing how the banking agencies operate and in deterring future insider abuse and misconduct.
HOUSE COMM. ON GOVERNMENT OPERATIONS, H.R. REP. No. 100–1088, 100th Cong., 2nd Sess. 89 (1988).
   It is clear nonetheless, that Congress intends that the decision to delay publication be left to agency discretion, and that the use of such discretion is authorized upon a determination that the publication poses a threat to the safety or soundness of the institution.2 In this instance I so find. I also find no insider abuse by current Bank management.
   Section 8(b) of the Act, 12 U.S.C. § 1818(b), identifies the factors which provide the basis for issuance of an order. The Administrative Law Judge is charged with making a statement in writing of the facts of record. The Administrative Law Judge acts as the initial fact-finder and decision maker of the agency, in this instance the FDIC. The latter, of course, has review authority to determine if an order should issue. By statute then, the Administrative Law Judge's decisional independence is unqualified except for subsequent agency review. Also, of course, the Administrative Law Judge should seek to apply the law applicable to the agency and naturally should expect reversal by the agency, should the law not be followed.
   Thus, with reference to the specific questions posed at the hearing, section 8(u)(2) does not mandate immediate publication of an order. However, since section 8(b)(2) requires that orders issued pursuant to a hearing become effective within thirty days of issuance, it appears that even though publication may be delayed, the effective date of an order itself cannot be suspended. Authority to craft a remedy in an 8(b) action is premised first on the finding that the basis for issuing an order exists. After such a finding, there is broad discretion to craft an order or to formulate remedies and require appropriate affirmative action. In doing so, careful attention must be given to the expert opinions of FDIC and State examiners. See Brickner v. Federal Deposit Insurance Corporation, 747 F.2d 1198, 1203 (8th Cir. 1984).
   In all events, any official determination whether by an examiner, an administrative law judge or by an agency cannot be inconsistent with what Congress intends.
   Because of the intent of Congress, compliance with the statutory publication provision must be met. The requirement cannot be avoided through subterfuge. See Chevron USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842–844, 104 S.Ct. 2778, 2781-82 (1984). ("If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency,
2 On brief FDIC enforcement counsel advises that all final Orders to Cease and Desist issued since August 9, 1989 have been made available to the public in accordance with the statute. This hopefully does not mean that all orders will be published regardless of the circumstances.
{{6-30-91 p.A-1722}}must give effect to the unambiguously expressed intent of Congress.") Moreover, section 8(b)(2) of the Act provides specifically that a cease and desist order "shall become effective at the expiration of thirty days after the service of such order upon the depository institution (expect in the case of a cease and desist order issued by consent, which shall become effective at the time specified therein.)" Therefore, there is a requirement to give effect to statutory provisions which express Congressional intent. See e.g., Ute Distribution Corporation v. United States, 721 F. Supp. 1202, 1208 n. 19 (D. Utah 1989).
   As the statutory language and legislative history indicates, the effect of publication of an order seemingly is not an issue which must be considered in determining whether a cease and desist order should be issued. If an unsafe or unsound bank practice is established, there is authority to issue an order in accordance with section 8(b) of the Act. Nonetheless, because of the adverse effect that publication of such an order may have, the overall effect of the order must be remedical and not punitive. This requires balancing and in this instance is an extremely close call because of the intense local competitive circumstances facing the Bank. In this regard, the prejudice to the Bank must be avoided by a reasonable delay in publication of the Order, particularly since there has been no insider abuse by current management of the Bank. Absent such a delay, the balance herein militates against issuance of an order because its incidental punitive aspect appears to be of significant dimension which will worsen not improve the plight of the Bank.

   G. FDIC Has Broad Discretion To
Fashion Affirmative Remedies

   The authority granted to the FDIC by statute for purposes of corrective action is contained in section 8(b) of the Act which provides:

    Such order may, by provisions which may be mandatory or otherwise, require the depository institution or its affiliated parties to cease and desist from the same and, further, to take affirmative action to correct the conditions resulting from any such violation or practice.
   Under this language, Congress has empowered the FDIC with discretionary authority to initiate various types of enforcement actions and to fashion remedies appropriate to the nature of such actions. Reviewing courts have extended deference to the expertise of administrative agencies in fashioning an appropriate remedy, Hoffman v. FDIC, Case No. 89–70466 (9th Cir. August 31, 1990); del Junco v. Conover, 682 F.2d 1338, 1340 (9th Cir. 1982) cert. denied 459 U.S. 1146 (1983), and the only basis upon which the courts will overturn the agency's remedy is where the terms of the order are arbitrary and not reasonably related to the legislative purposes of the statute under which action was initiated. First State Bank of Wayne County v. FDIC, supra, 770 F.2d at 82–93.
   Section 8(b) of the Act provides that the FDIC can require affirmative action to correct the "conditions" resulting from any unsafe or unsound practice or violation of law. Once it is established that certain conditions resulted from unsafe or unsound practices or violations of law, the FDIC has authority to issue an order that will ensure that the resulting conditions for which action was initiated by the FDIC are corrected, or if already corrected, that they remain corrected during the life of the Order. This as noted is a remedial function, not one of punishment.

H. Contentions Of The Bank On
Post-Hearing Brief Relative to Classified
Loans

   The Board of Directors and management of Mansfield Bank readily admit the loan portfolio contains problems; however, they vehemently dispute some of the FDIC classifications, namely:

    * * * $    278,000.00 substandard
    * * *  et al       311,000.00 substandard
    * * *       107,000.00 substandard
    * * *       215,000.00 substandard
    * * *       384,000.00 substandard
TOTAL $1,295,000.00

   The examiner in charge of the FDIC August, 1989 examination was FDIC witness Deanna Caldwell. Ms. Caldwell testifies, "An adverse classification is based basically upon the payment history of the credit, the repayment capacity of the borrower and the protection provided by collateral." (I, 25: 16–19)
   In presenting the results of her examination at the hearing, Ms. Caldwell first lists loans she felt inadequately secured. This list included the * * * and * * * loans. Ms. Caldwell next lists loans with inadequate financial information which included loans of {{6-30-91 p.A-1723}}Messrs. * * * and * * *. The * * * and * * * loans were criticized for failing to show any source of repayment. The * * * and * * * credits had been renewed without additional collateral. (I, 27–33)
   On cross-examination Ms. Caldwell admits that the loans indicated as inadequately collateralized were, in fact, current in their payments—factor number one in her classification criteria. (I, 58:60) She further acknowledges that collateral only played a part in determining the quality of the loan. (I, 59: 8–10) She also acknowledges that loans listed without sources of repayment were on amortization schedules and current. (I, 61–63)
   Specifically on the * * * loan, Ms. Caldwell does not recall the payment history; however, the exam noted "Maker is an elderly, long term bank customer that has always liquidated debt in an orderly fashion." (FDIC Ex. 2, 2-b-8.) Ms. Caldwell had included the * * * loan in the list with inadequate financial information, yet the exam noted a current financial statement with a net worth of $700,000 versus a loan balance of $278,000. Testimony indicated the debt had been reduced $72,000 in four years. (FDIC Ex. 2; II, 76)
   The FDIC exam stated, "A substandard classification is extended based upon the advanced age of the maker and the questionable ability of maker to service this debt adequately over an extended term.". Bank President William Dorroh as well as all three Directors contest this classification. Mr. Dorroh stresses Mr. * * *'s impeccable payment record. (II, 329:10–11) and emphasizes the size of Mr. * * *'s estate. (II, 330-31)
   Ms. Caldwell next answers questions concerning the * * * and * * * related loans. This line had been listed by Ms. Caldwell as inadequately secured. The examination had noted the large deposits of the entities were not pledged to the loan. (FDIC-II, 2-b-22) The examiner was also unaware of Louisiana Revised Statute 9:316 providing a statutory pledge of such deposits. (M-11) The examiner had also missed pledge language contained in the promissory notes. Ms. Caldwell admits this did make a difference in the credit. (I, 76–89)
   All the Directors and President Dorroh oppose any classification of this loan. Mr. Dorroh again stresses the timely payment history of the credit. (II, 338: 16–18)
   As to the * * * loan, Ms. Caldwell acknowledges that the loan had no payment problems, and that the borrower had a net worth of $1.6 million. She said the loan was classified because while the source of repayment had been identified, it had not been quantified. (I, 93–94)
   Mr. Dorroh testifies Mr. * * * paid $5,000 to the Bank every month in a timely manner and noted he was satisfied with the $1.6 million net worth financial statement (II, 340: 17–25) and the ability of the borrower to repay. (II, 342: 8–12)
   Ms. Caldwell testifies the loan of * * * had been classified due to an inadequate payment history, long amortization and lack of financial information. The loan had been reduced by $137,000 since the FDIC exam to the State exam (and is now paid in full). At the hearing, a $78,000 balance remained secured by real estate with a $144,000 appraisal. The FDIC exam reported the loan was less than 30 days past due at the time of the exam and was brought current during the exam. Ms. Caldwell also admits the reduction from $250,000 to $78,000 in four years reflected well on the credit. (FDIC Ex. 2: 2-b-1; I, 96–99)
   Mr. Dorroh testifies Ms. Caldwell had incorrectly stated there was no appraisal of the * * * collateral in the file. (II, 315:24–25) He also pointed out the monthly $3,000 payment on a $215,000 debt would result in only small principal reductions. (II, 354: 14–24) As a result of the FDIC classification, Mr. * * * sold some of his real estate and reduced his debt to $78,000 secured by real estate appraised at $144,000. (II, 354: 1–6) The State of Louisiana did not classify this loan in its March, 1990 examination.
   Ms. Caldwell testifies as to the * * * loan. She indicated this classification was influenced by outdated inventory and lack of financial information particularly, inventory inspections. (FDIC Ex. 2, 2-b-20 - I, 99: 102) The State of Louisiana did not classify this loan at the March 16, 1990 examination.
   President Dorroh testifies that the * * * account was in a past due status at the FDIC examination as a result of the timing of loan restructuring. (II, 345–46) He also testifies he personally inspected the inventory on a regular basis. (II, 345: 924)
   Three Directors of Mansfield Bank testify on these five loans. The Directors were very {{6-30-91 p.A-1724}}familiar with the individuals and with their relationships with Mansfield Bank. All three Directors felt all of the loans were well collateralized and "good loans". All felt the credits should not have been classified. Respondent urges that the classifications assessed by examiner Caldwell on these five credits, in particular, are subject to challenge under the criteria set forth in Sunshine.
   Examiners' findings may be set aside if they are found to be without factual basis, can be shown to be arbitrary and capricious, or outside a zone of reasonableness. (Sunshine, supra)
   Respondent submits the foregoing five classifications fail to survive the Sunshine test and should be removed from the list of the Bank's classified assets. Without these classifications, total classified assets drop to $4,635,000 or 155.22 percent of total classified assets to total equity capital, a 25 percent improvement over the FDIC examiner's calculations.
   Despite Respondent's assertions to the contrary, the weight of the evidence demonstrates that the "Substandard" classifications of the credits of * * *, * * * and * * * were not arbitrary or capricious or outside the zone of reasonableness. A review of the record indicates that each of the classifications in question are based on an in depth analysis of the various credits. (Tr. 61–101, 163–167, FDIC Exhibit No. 2)
   The Bank's argument that merely one or two factors are utilized to determine credit quality and that if one of the factors (e.g. a credit is not past due in its payment schedule) is satisfied, this would negate any reason to classify a loan. In fact, the testimony includes observations from the examiner that many aspects of a particular credit are explored for weaknesses during an examination and that a determination that a classification is warranted results from this review. For example, Respondent argues that the classification of * * * was based solely on his age and that FDIC failed to consider the fact that the credit was current. However, Respondent disregards the fact that the credit may require repayment from either the sale of collateral or from the borrower's estate. (FDIC Exhibit No. 2, Tr. 331–333) It also should be noted that Mr. Dorroh testifies that Respondent had failed to ascertain information concerning estate planning on the part of Mr. * * *. (Tr. 332–333)
   Respondent, in its criticism of the classification of the * * * credit, emphasizes that the borrower's payments were current. However, Respondent fails to dispute the identified problems with the credit, which include inadequate collateral, unconfirmed status of borrower's liquid financial condition and lack of quantification of the ability of the borrower to continue to meet his payments (FDIC Ex. 2, Tr. 94–96) As in the credit, Respondent, in their discussion of the * * * and * * * credits, accentuate one aspect of the credit and fail to address other aspects of the credit that were also important in determining a classification for these credits. (Tr. 61–101, 163–167, FDIC Ex. No. 2) Also, the fact that the * * * loan has been repaid does not mean that the loan was FDIC misclassified. Further, the fact that the State did not classify the * * * and * * * loans does not mean that they were misclassified at an earlier point in time by the FDIC.
   Finally, if the five classified loans were excluded from the ratio of classified assets to total equity capital and reserves, the ratio would shift from 198.59 percent to a still high level of 155.22 percent. Even examining the five loans in the most favorable light, the Respondent's ratio is excessive.
   In short, the argument set out by the Bank partially overlooks the detailed analyses and conclusions of the examiner. The record substantiates the findings of the examiner.
   While Respondent urges that these five loans, which make up 25 percent of the assets classified by the FDIC in the August, 1989 examination are incorrect, it is further contended that even if such classifications must stand, Mansfield Bank and Trust Company does not require enforcement action by the FDIC in the form of a Cease and Desist Order.

I. Contentions Of Respondent Concerning
The Need For A Cease And Desist Order
And The Effect That Such An Order Will
Have Upon The Bank

   As a result of the August 1989 examination, Ms. Caldwell stated, "The primary obstacle to the health of the Bank is the large volume of the inferior quality loans currently in the portfolio. The loans adversely classified herein all consist of debts of long term bank customers or debt that was once considered `good' that is now troubled debt." (FDIC Ex. 2) President Dorroh and Directors Means, Dixon and Dillard stress the {{6-30-91 p.A-1725}}disastrous economic conditions that have hit Mansfield and DeSoto Parish. The poor economy was acknowledged by FDIC examiner Caldwell and FDIC Review Examiner Stacey. In spite of the "excessive classifications" Examiner Caldwell found at Mansfield Bank, in the Examination Report's confidential portions she noted, "The Bank appears to have stabilized, and the Board is apparently willing to pave the road to recovery with personal funds ...". "Due to apparent stabilization and to concerted efforts on the part of management to improve the condition of the Bank, continuance of the outstanding Memorandum of Understanding is recommended." (FDIC Ex. 2, Confidential-pink sheets)
   At the hearing Examiner Caldwell testifies that she believes that continuance under the Memorandum is sufficient. (Tr. 172) When asked by Mansfield counsel: "Q" Based on this exam and what you did at the Bank, are you still of the opinion that this Bank could live under a Memorandum of Understanding and do what is necessary to turn this to a good, favorable Bank? "A" Yes. (Tr. 155)
   However, FDIC witness Nick Stacey testifies, "What we are seeking to accomplish with this Order is to provide a Plan, a rehabilitation and an operating plan that we think that, if followed, will go a long way towards bringing the Bank back to a safe and sound condition."
   The Memorandum of Understanding signed by Mansfield Bank and Trust Company and the Office of Financial Institutions for the State of Louisiana was executed on June 29, 1989. The Memorandum places certain requirements upon Mansfield Bank which are to be accomplished within 180 days. When the FDIC examination of August 1989 occurred, the Memorandum was in place for less than sixty days, Respondent Mansfield Bank submits that any allegation that the Bank failed to comply with the requirements of the Memorandum are premature and without basis given the brief effective time of the Memorandum.
   While Ms. Caldwell and Mr. Stacey testify on behalf of the FDIC as to various problems in the Bank, Ms. Caldwell and her examination (FDIC Ex. No. 2) and Mr. Stacey in his testimony, indicate that the Bank's problems largely are with the loan portfolio. "The primary obstacle to the health of the Bank is a large volume of inferior quality loans currently in the portfolio." (FDIC Ex. No. 2) The primary problems in the Bank is extremely heavy volume of adverse classifications, which has served to deplete or to weaken earnings over the years and also has depleted the capital position of the Bank to what we consider a marginal situation based on the volume of assets classified." (Tr. 221)
   Respondent argues that nothing in the Cease and Desist Order will accomplish the FDIC's stated purpose.
   Mansfield Bank and Trust Company has made progress since the August, 1989 examination. As of March 16–30, 1990, based upon the results of examination of the Bank by the Office of Financial Institutions, classified assets were reduced to $4,472,000.00, a $1,500,000.00 reduction since the 1989 FDIC examination. The Bank's reserve for loan losses stood at $703,000. Overdue loans are reduced from 6.78 to 4.35 percent. The Bank's capital is increased only slightly from 6.60 to 6.62 percent. Liquidity stands at 32 percent with a negative dependency ratio of 7.22 percent. The State of Louisiana notes the improved ratios reflect favorably upon management. (Mansfield Ex. No. 1)
   The Deputy Commissioner for the State of Louisiana, Linda Drake, testifies for the State of Louisiana as to the examination which commenced March 16, 1990. The examination addressed all points contained in the outstanding Memorandum of Understanding. The memorandum requires capital to be at 7.0 percent within 120 days, but capital actually stood at 6.62 percent. Other than the capital requirement, the Bank basically is in compliance with the Memorandum. (Tr. 576) The State commends the Bank for improvement in its financial condition and for its progress in reducing adversely classified assets. "The insignificant amount of losses extended and the excellent performance of recovering previously charged-off loans is commended." (Tr. 578)
   When asked as to the position of the State of Louisiana relative to the Cease and Desist Order sought by the FDIC, Ms. Drake testifies "The Commissioner's opinion has been, and the position of the office is that the Bank did not have sufficient time between the time that the Memorandum was signed and the FDIC report to show the improvement that is noted here, and the Cease and Desist should not be signed." (Tr. 579)
{{6-30-91 p.A-1726}}
   FDIC Review Examiner Nick Stacey testifies that the August, 1989 examination rates the Bank as a composite "4" which classifies the institution as a problem bank. (Tr. 221) Mr. Stacey testifies that pursuant to FDIC procedures, the Bank should have a formal rehabilitation order issued under Section 8(b) of the FDI Act. (Tr. 222) FDIC policy as set forth in the DOS Manual of Examination Policies indicates that "Banks with composite ratings of "4" or "5" will by definition, have problems of sufficient severity to warrant formal action." However,

    Exceptions to the policy may be considered with the condition of the bank clearly reflects significant improvement resulting from an effective corrective program or where individual circumstances strongly mitigate the appropriateness or feasibility of this supervisory tool. For example, acceptable action by the State authority might preempt the need for FDIC action, or qualified new management might allow the use of an informal memorandum of understanding instead of a Cease and Desist Order
    DOS Manual of Examination Policies, 9.3-1.
On cross examination, Mr. Stacey acknowledges that not all 4 rated banks are under Cease and Desist orders. (Tr. 249)
   The FDIC Policy Manual provides for exceptions where the Bank has made significant improvement. It also provides an exception where individual circumstances strongly mitigate the appropriateness or feasibility of the supervisory tool. Respondent argues that the Cease and Desist Order proposed by the FDIC cannot improve Mansfield Bank. In Mr. Stacey's testimony, he reviews the affirmative provisions of the Order. He testifies that Paragraph 1 of the Order requires the Bank to maintain qualified management. He states the paragraph is not intended to replace management, but to give the FDIC the power to do so. The Order requires establishment of a compliance committee. The Order requires that within 180 days the Bank maintain an adjusted capital ratio of 7.5 percent. The Board is required to provide a written profit plan and charge off assets classified loss and one-half of assets classified doubtful as of the August 18, 1989 examination. The Bank is also required to make reductions in classified assets over a 360 day period. The Bank is prohibited from making loans to borrowers who are presently classified. The Order requires review and revision of the loan policy and establishment of an internal loan review and grading system. The Order requires an adequate loan loss reserve, and a revised liquidity and funds management policy. The Bank may not pay dividends and must disclose its condition to its shareholders.
   The Memorandum of Understanding contains many of the same provisions. As noted earlier, the State of Louisiana believes the Bank is in substantial compliance with this Memorandum. Under cross examination, FDIC witness Nick Stacey acknowledges basic compliance with the MOU. (Tr. 309–312)
   Mr. Dorroh stresses the improvements that the Bank had made under the Memorandum of Understanding and ends his direct testimony as follows:
    We recognize we have had problems. We recognize that there is areas of improvement at Mansfield Bank, but we truly don't believe that a more severe penalty could get us to do anymore than we have already done, because we have worked just as hard as we can and put long hours and put extra board meetings in and we are doing everything possible that we feel can be done.
    Regardless of the penalty, whether courtenforceable or not, it is impossible for us to do anymore. We have put money into the bank and holding company. We have stopped paying dividends. We recognize our problems and we are attacking them systematically.
    I think the progress at the state exam — I think the progress on the past due loans that we have made — I think that the increase in reserve — all this points to the fact that we have.
    And we don't agree — disagree to many of the FDIC's suggestions. We think they are well-founded. As I stated before, we call in professional help when we think we need it. But in the case of the cease and desist, we feel we entered an agreement with the State and the FDIC because they consented, we have lived up to it, and we took it on the chin when we had to.
    But we think we have done everything that we can do. We think we have lived up to our agreement, and we don't want — and we don't feel like a cease and desist {{6-30-91 p.A-1727}}with the negative aspects that I previously discussed would be even remedial to the bank.
    I think it would—we would digress, and I think that our whole organization concurs with that. (Tr. 392–394)
   Director Leigh Dillard testifies that the Board of Directors has taken every step they could think of and everyone that has been recommended to them. They have tried to do everything they think they possibly could do. (Tr. 492) Director David Means testified as to the Bank's efforts on the Memorandum of Understanding "It was something that management worked diligently on. It was something that the board worked diligently on, that we all gave it our very best shot, and we felt like that we had substantially complied with that MOU." (Tr. 546) Although this is mostly true, I have no reason to disagree with the judgement of Mr. Stacey that a C&D order is required, except on the subject of publication.
   The fact that the Respondent has improved its overall condition does not negate the need for imposition of a cease and desist order. Even with removal of numerous classified loans, the Bank is at risk with a composite "4" by the FDIC and the State of Louisiana. This rating is reserved for institutions with severe problems, such as this Respondent. As testified to by both the State and the FDIC, the Respondent continues to require rehabilitation and remains on their problem bank lists. (Tr. 219, 300, 586) Both the FDIC and the State OFI have devoted considerable time and resources to rehabilitating Respondent to a safe and sound condition. An order is warranted even though there is no assurance that it will produce results adequate to place Respondent within the realm of safety and soundness required by the FDIC and State. The 1988 FDIC Report (FDIC Exhibit 1, P. 1) dates that Respondent's Board entered into a Board Resolution in lieu of a MOU in November 1986. In May 1989 Respondent stipulated to an MOU. To date, these non-enforceable actions to place Respondent in an adequate capital position have failed.
   The weight of the evidence supports FDIC's position that the difficulties sustained by Respondent were not primarily the result of the Louisiana economy. They primarily are the result of actions or the lack of actions undertaken by Respondent's prior management and the failure of present management to overcome the past difficulties. Respondent did achieve a $2 million dollar recapitalization and of course it lost approximately $2.5 million due to fraudulent investments made prior to 1982 by Respondent's former president. However, to continue to blame Respondent's poor performance and the Board's lack of oversight on events which transpired ten years ago is untenable in light of the many loans for which Respondent has been criticized since that time.
   The fact that a few short years after a two million dollar recapitalization, the Respondent is uniformly considered a severe problem bank with an inadequate capital level shows the inadequacy of management efforts to date. As testified to by virtually every witness, the Respondent is once again in need of capital. Examining Respondent's current capital needs in light of the recent capital infusion, it is concluded that loan policies, procedures and inadequate Board oversight has substantially contributed to the poor quality of Respondent's asset portfolio. (Tr. 22–25, 219–222, 229–231) Furthermore, even Respondent's own consultant found that Respondent's problems were not the result of the economic downturn in Louisiana. (See FDIC Ex. No. 9)
   Respondent's argument that the MOU between itself and the State is sufficient to return Respondent to safe and sound condition cannot be sustained. Respondent is a problem bank (Tr. 173, 21, 392, 494, 526, 581), its loan portfolio needs work (Tr. 37, 221, 436, 491, 526, 574, 583), and it is in need of capital. (Tr. 166-67, 221-22, 392, 504, 530, 584) Further steps are needed to place Respondent on a safe and sound footing and decrease the risk Respondent currently represents to the Insurance Fund. A cease and desist order should help this process, but not without the consideration next discussed.
   Under present Federal Law, issuance of a final Order requires publication of that Order in the local press. Mr. Stacey testifies that publication of the Order was not considered in the FDIC's decision to pursue the 8(b) action. (Tr. 223) President Dorroh and Directors Dillard and means all testify as to the highly competitive banking environment of Mansfield. Five institutions exist to service a community of 5,700 individuals. All {{6-30-91 p.A-1728}}believe publication of the Cease and Desist Order would have a very detrimental effect on the Bank. Mr. Dorroh testified, "I think it would be a severe blow to the progress that we are obviously making through the State exam." (Tr. 389–390) Dr. Dillard thinks that publication would cause deposits to be pulled out and cause the Bank to loose its ability to compete in the local market. (Tr. 497–498) David Means feels that publication of the Order would create a mass exodus of Bank customers. (Tr. 548)
   The management and Directors of Mansfield Bank and Trust strongly protest allegations that they have not done their job and have engaged in hazardous practices. These gentlemen believe these allegations are an assault on their integrity. As Dr. Leigh Dillard says:
    And secondly, I think to a man around the board room that they would have—the document was laid there for us to look at that that was perceived as an insult to every man there. To sign it admitted that you had engaged in hazardous practices. You had been derelict at your duty. And I forget exactly how the language read, but when I read it, I got mad.
    And to a man, this group of men, who are honest, hard-working men—most of us self-made—objected to saying that we had not done the best we could do and did not know our job and had not been honest and forthright in our dealings, because we have.
    And to sign that and say that we had not would be—it is just a lie. We couldn't do it. And I think to a man, that was the sentiment. (Tr. 498:6–20)
    Director David Means testifies:
    And I honestly could not see any reason why I should have to sign something that said that our bank had been guilty of lax lending practices and all of the other things that that cease and desist order said, when it simply wasn't so.
    And we discussed that long and hard, and we had a meeting late into the night, and we had that call with you and we simply told you, we can't do that. You know, we don't have anything that we got to confess to. All we have got to confess to is not being able to earn enough money. (III, 547:8–18)
   In my opinion, the testimony of President Dorroh and Directors of Mansfield Bank establishes that they are intelligent, well informed and effective relative to the well being of the Bank. President Dorroh is supported by his Directors and is familiar with every credit in his Bank and every aspect of the Bank's business. Director Dixon has been on the Bank's board since the Bank was opened. Directors Dillard and Means are professional men, one a lawyer and the other a doctor. They possess extensive knowledge of the economic and political facets of their community. They are outside Directors and are dedicated participants in the sound operation of Mansfield Bank and Trust Company.
   The Respondent shows that Mansfield is a small over-banked community. It must be excluded from FIRREA's immediate publication requirement. The purpose is to impose a remedy not to punish the Bank.

ULTIMATE FINDINGS AND
CONCLUSIONS

   Upon consideration of all of the foregoing, a cease and desist order essentially as proposed by FDIC enforcement staff is appropriate and should be entered. The order should not be immediately published because there are not now "bad guys" at the Bank who have engaged in "abusive practices or misconduct." (Cf. H.R. Rep. No. 100 – 1088, 100th Cong. 2nd Sess. 89 (1988)), The bank needs breathing room as per FDIC Examiner Caldwell and OFI Executive Deputy Commissioner Drake. These opinions of those experts must not be ignored. In my opinion, there is no need of any kind for immediate publication of a C&D order. The exception to immediate publication conceived by Congress clearly is applicable.
   It must be recognized that the "time" of publication is committed solely to the discretion of the FDI. Because of this requirement, I find as an appointed agent of FDIC, albeit interim, publication of a cease and desist order must be deferred for a "reasonable" period, so as to provide an opportunity for the C&D to achieve its intended purpose. I recommend a two year delay on publication. As stated by the Bank at Page 14 of its Reply Brief dated November 5, 1990, "The progress the Bank has made could be quickly undone with a single press release."
   A recommended order next follows:

{{6-30-91 p.A-1729}}

V. ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of affairs of the Bank, cease and desist from the following unsafe or unsound banking practices:

       (a) operating with hazardous lending practices;
       (b) operating with inadequate primary capital;
       (c) operating with a large volume of poor quality loans;
       (d) operating with an inadequate loan valuation reserve;
       (e) operating in such a manner as to produce operating losses;
       (f) operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits; and
       (g) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:
    1. (a) During the life of this ORDER, the Bank shall have management qualified to restore the Bank to a sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible for supervising the Bank's overall lending function. The chief executive officer and the senior lending official may be the same individual.
       (b) Present management shall be assessed on its ability to:
         (i) Comply with the requirements of this ORDER;
         (ii) Improve and thereafter maintain the Bank in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, and earnings adequacy; and
         (iii) Comply with all applicable State and Federal laws and regulations.
         (c) (i) During the life of this ORDER, the Bank shall notify the Regional Director of the Memphis Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the State of Louisiana ("Commissioner") in writing of any resignations and/or terminations of any members of its board of directors and/or any of its senior executive officers.
         (ii) The Bank shall comply with section 914(a) of FIRREA, 12 U.S.C. § 1831i, which includes a requirement that the bank shall notify the Regional Director and the Commissioner in writing at least 30 days prior to the individual assuming the new position, of any additions to its board of directors and its senior executive officers.
       (d) Within 30 days from the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure that the Depository Institution complies with the provisions of this ORDER. At least two-thirds of the members of such committee shall be independent, outside directors as defined herein. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.
       (e) For the purposes of this ORDER, an "outside director" shall be an individual:
         (i) Who shall not be employed, in any capacity, by the Bank or its affiliates other than as a director of the bank or an affiliate;
         (ii) Who shall not own or control more than 5 percent of the voting stock of the Bank or its holding company;
         (iii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than 5 percent of the Bank's primary capital;
         (iv) Who shall not be related to any directors, or principal shareholders of the Bank or affiliates of the Bank; and
         (v) Who shall be a resident of, or engage in business in, the Bank's trade area.
    2. (a) Within 180 days from the effective date of this ORDER, the Bank shall increase its primary capital by no less than $400,000. Within 180 days from the effective date of this ORDER, and during {{6-30-91 p.A-1730}}the life of this ORDER, the Bank shall maintain adjusted primary capital equal to or greater than seven and one-half (7.5) percent of the Bank's adjusted Part 325 total assets.
       (b) Any increase in primary capital necessary to meet the requirements of Paragraph 2(a) of this ORDER may be accomplished by the following:
         (i) The sale of new securities in the form of common stock; or
         (ii) The direct contribution of cash by the directors, shareholders, or parent bank holding company of the Bank; or
         (iii) The collection in cash of assets classified "Loss" without loss or liability to the Bank; or
         (iv) The collection of assets previously charge-off; or
         (v) Any other method acceptable to the FDIC.
       (c) If all or part of the increase in primary capital required by Paragraph 2(a) of this ORDER is accomplished by the sale of new securities, the board of directors of the Bank shall adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation of the plan and, in any event, not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination.
       (d) In complying with the provisions of Paragraph 2 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph shall be furnished within 10 days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.
       (e) For purposes of this ORDER the terms "primary capital", "total capital", and "Part 325 total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively, subsections 325.2(h), 325.2(1) and 325.2(k), 12 C.F.R. 325.2(h), (1) and (k). The "Analysis of Capital" schedule on page 3 of the FDIC Report of Examination provides the method for determining the ratio of adjusted primary capital to adjusted Part 325 total assets as required by this ORDER.
    3. (a) Within 60 days from the effective date of this ORDER, and within the first 30 days of each calendar year thereafter, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank for each calendar year. The 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 on not less than a quarterly basis; and
         (iv) A description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
       (b) Each 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 {{6-30-91 p.A-1731}}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.
       4. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" and one-half of the assets classified "Doubtful" as of August 18, 1989, and that have not been previously collected or chargedoff. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
       (b) Within 90 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of August 18, 1989, and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $5,000,000.
       (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of August 18, 1989, and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $4,500,000.
       (d) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of August 18, 1989, and those assets classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $3,750,000.
       (e) The requirements of Paragraphs 4(a), 4(b), 4(c), and 4(d) above are not to be construed as standards for future operations, and, in addition to the foregoing, the Bank shall eventually reduce the total of all adversely classified assets. As used in Paragraph 4(b), 4(c), 4(d), and 4(e) the word "reduce" means (i) to collect, (ii) to charge-off, or (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.
    5. (a) Beginning with the effective date of this ORDER, the Bank shall not make any further extension of credit to any borrower whose loans are charged-off, in whole or in part, or are adversely classified "Loss" as of August 18, 1989, and remain uncollected.
       (b) Beginning with the effective date of this ORDER, the Bank shall not make any further extension of credit to any borrower thereof whose loans in the aggregate exceed $50,000 and are adversely classified "Substandard" as of August 18, 1989, unless such extension has been approved by a majority of the Bank's board of directors in advance, and the Bank's board of directors has detailed in the written minutes of the meeting how it has affirmatively determined all of the following: (i) that the extension of credit is in full compliance with the Bank's loan policy, (ii) that it is necessary to protect the Bank's interest or that the extension of credit is adequately secured, (iii) that based upon credit analysis the customer is deemed to be creditworthy, and (iv) that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title, and lien documents. The minutes shall also include the following information about the extension of credit: (i) The amount adversely classified as of August 18, 1989, (ii) the current balance, (iii) the amount of credit requested, (iv) a description of the collateral and its value securing the credit, and (v) a full description of the documentation presented to the board of directors including the date of the borrower's most recent financial information and the borrowers's current income or cash flow data.
       (c) Beginning with the effective date of this ORDER, the Bank shall not renew any loan without the full collection of interest due. The issuance of separate notes to the borrowing customer or a third party, the proceeds of which pay interest due, shall not satisfy the requirements of this paragraph unless these separate notes receive prior board approval in the same manner as outlined in Paragraph 5(b).
   6. Within 60 days from the effective date of this ORDER, the Bank shall review its written loan policy and make whatever changes may be necessary to provide for the safe and sound administration of all aspects of the lending function. Proper and adequate loan documentation or evidence thereof as is required by sound banking practices before disbursement of the loan proceeds to bor- {{6-30-91 p.A-1732}}rowers or before renewal or extensions of existing loans shall be part of the review. Evidence of the review and establishment of procedures to ensure compliance with the loan policy shall be reduced to writing. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
    7. (a) Within 30 days of the effective date of this ORDER, the board shall establish an internal loan review and grading system ("System") to periodically review the Bank's loan portfolio and identify and categorize problem credits. As a minimum the System shall provide for:
         (i) Identify the overall quality of the loan;
         (ii) The identification and amount of each delinquent loan;
         (iii) An identification or grouping of loans that warrant the special attention of management;
         (iv) For each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the reason(s) why the particular loan merits special attention;
         (v) An identification of credit and collateral documentation exceptions;
         (vi) The identification and status of each violation of law, rule or regulation;
         (vii) An identification of loans not in conformance with the Bank's lending policy, and exceptions to the Bank's lending policy;
         (viii) An identification of insider loan transactions; and
         (ix) A mechanism for reporting periodically, no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.
       (b) A copy of the reports submitted to the board, as well as documentation of the action taken by the Bank to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.
    8. (a) Within 30 days of the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve shall be established by charges to current operating income, together with collection of assets previously charged-off. In complying with the provisions of this paragraph, the board of directors of the Bank shall review the adequacy of the Bank's reserve for loan losses prior to the end of each quarter. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of any increase in the reserve, and the basis for determination of the amount of the reserve provided.
       (b) Within 30 days from the effective date of this ORDER, the Bank shall review all Reports of Condition and Income filed with the FDIC on and after August 18, 1989, and shall amend and file with the FDIC amended Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the date of each such Report. At a minimum each such Report shall be amended to reflect elimination of all assets classified "Loss" and one-half of the assets classified "Doubtful" as required by Paragraph 4 of this Order and shall incorporate an adequate reserve for loan losses accurately reflecting the Bank's loan portfolio as of August 18, 1989, as required by Paragraph 7(a).
   9. Within 60 days from the effective date of this ORDER, the Bank shall revise and adopt a written liquidity and funds management policy. Such policy shall include the establishment of acceptable ranges of ratios in the following areas: volatile liability dependence, total loans to total deposits, and temporary investments to volatile liabilities. In addition, the liquidity policy shall incorporate a funds management program which designates acceptable levels for: volatile liabilities, including borrowings; asset mix, including temporary funds and investments, long-term investment securities and classes of obligors, and loans to deposits; and ratesensitive assets as a percent of rate-sensitive liabilities. The written liquidity and funds management policy shall be submitted to the Regional Director and the Commissioner for review and comment.
   10. While this ORDER is in effect, the Bank shall not declare or pay any cash dividends on its capital stock without the prior written approval of the Regional Director and the Commissioner.
   11. Following the effective date of this {{10-31-91 p.A-1733}}
   ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER, (i) in conjunction with the Bank's next shareholder communication, and also (ii) 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. On the fifteenth day of the second month following the effective date of this ORDER, and on the fifteenth day of every third month thereafter, the Bank shall furnish written progress reports to the Regional Director detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties.
   This ORDER shall become effective 10 days from the date of its issuance.
   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.
   This ORDER shall not be published for a period of two years after its effective date.
   The decision which supports this ORDER shall not be published until references to persons receiving classified loans are fully masked from public disclosure.
   By Paul S. Cross, Administrative Law Judge on the 16th day of November, 1990.

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