Federal Deposit
Insurance Corporation

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   [¶5195] In the Matter of The American Bank of the South, Merritt Island, Florida, Docket No. FDIC-92-17b (3-30-93).

   FDIC Board adopts recommendation of an administrative law judge and issues a cease and desist order, finding that bank had engaged in unsafe and unsound practices and requiring it to take corrective action, including improving management, increasing capital and reserves, improving earnings and asset quality, reducing loan concentrations, and implementing effective lending and collection policies.

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   [.1] Cease and Desist Orders—Defenses—External Conditions
   Evidence shows that bank's poor condition is a result of poor management policies and practices, as noted in warnings by state and federal examiners over three years, and not of external forces.

   [.2] Cease and Desist Orders—Defenses—Cessation of Violation
   Cessation of violation does not deprive FDIC of authority to issue a cease and desist order or obviate the need for an order to prevent future violations.

In the Matter of
THE AMERICAN BANK OF THE
SOUTH
MERRITT ISLAND, FLORIDA
(Insured State Nonmember Bank)
DECISION AND ORDER
TO CEASE AND DESIST
FDIC-92-17b

   This proceeding is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") as a result of a Notice of Charges and of Hearing ("Notice") issued against The American Bank of the South, Merritt Island, Florida ("Bank" or "Respondent"), pursuant to section 8(b)(1) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818(b)(1), and Part 308 of the FDIC's Rules of Practice and Procedure, 12 C.F.R. Part 308. The Notice alleged that the Bank had engaged in specified unsafe or unsound banking practices, and violated portions of the FDI Act resulting in operational and managerial weaknesses requiring corrective measures in the nature of a cease-and-desist order. The Recommended Decision Ordering Cease and Desist ("Recommended Decision") issued by Administrative Law Judge Walter J. Alprin ("ALJ") found in favor of the FDIC on all issues and recommended the entry of an order requiring Respondent to cease and desist from engaging in the unsafe and unsound practices and violations of law, and to correct the adverse conditions resulting therefrom.¹
   The Board concurs with the ALJ's lengthy and detailed Recommended Decision and, therefore, adopts the Recommended Decision and the Findings of Fact contained therein.

   The Notice was issued on January 16, 1992. Respondent timely answered the Notice and requested a hearing. Following preliminary motions and discovery proceedings, a hearing was held before the ALJ in Orlando, Florida, on July 21, 22, and 23, 1992. Both parties filed appropriate briefs and replies. The ALJ issued his Recommended Decision on November 24, 1992, and on December 23, 1992, counsel for Respondent filed Exceptions.

   As correctly noted by the ALJ, "there are virtually no fact or credibility issues in this proceeding." R.D. at 3. Following a series of Federal and state bank examinations in which the rapidly deteriorating condition of the Bank was noted, the FDIC issued its Notice alleging that the deterioration was the result of unsafe and unsound practices engaged in by the Bank including: hazardous lending and lax collection practices; an excessive volume of poor quality loans and other assets in relation to its total assets and in relation to its capital; inadequate operating income; inadequate allowance for loan and lease losses for the volume, kind, and quality of loans held; failure to provide for an adequate diversification of risk in the Bank's investment of funds; a loan policy which is inadequate for the volume, kind, and quality of loans held; violations of section 23A(a)(1)(B) of the Federal Reserve Act, 12 U.S.C. §371c(a)(1)(B)²; management policies and practices which are detrimental to the Bank and jeopardize the safety of the

The volume of problem loans and foreclosed real estate, coupled with high overhead expenses attributable to prior years' branching activity, has kept the bank from achieving its earnings potential. Retained earnings failed to keep pace with the bank's 15% growth rate in 1988. This has resulted in a decline in the adjusted capital ratio from 8.12% of the 9-30-87 examination to the present ratio of 7.70%. The downward trend of this ratio is of concern, especially in view of the quantity of problem assets reflected in this Report. (FDIC Ex. 4/7).

...the examiner notes continued deteriorating asset quality with an inadequate loan loss reserve, distorting the bank's earnings and capital, and having the potential to ultimately affect the bank's safety and soundness. The bank's continued asset quality problems appear to result from its emphasis on asset-based lending. In asset-based lending, collateral value is the prime criterion for lending and less emphasis is place(d) on other considerations, including a borrower's ability and willingness to repay. Asset-based lending can constitute unsafe and unsound practices and the examiner has described some of the bank's practices as such. (FDIC Ex. 3/1).

   12 U.S.C. §1818(b)(1), pursuant to which the Federal bank regulatory agencies (here, the FDIC) may impose Orders to Cease and Desist against banks that engage in unsafe or unsound practices and violations of law or regulation, provides in particular part that:

[I]f, in the opinion of the appropriate Federal banking agency, any insured depository institution, depository institution which has insured deposits, or any institution-affiliated party is engaging or has engaged, or the agency has reasonable cause to believe that the depository institution or any institution-affiliated party is about to engage, in an unsafe or unsound practice in conducting the business of such depository institution, or is violating or has violated, or the agency has reasonable cause to believe that the depository institution or any institution-affiliated party is about to violate, a law...the agency

{{5-31-93 p.A-2209}}may issue and serve upon the depositor institution or such party a Notice of Charges in respect thereof....(if) upon the record made at any such hearing, the agency shall find that any violation or unsafe or unsound practice specified in the notice of charges has been established, the agency may issue and serve upon the depository institution or the institution-affiliated party an order to cease-and-desist from any such violation or practice. Such order may, by provisions which may be mandatory or otherwise, require the depository institution or its institution-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.

At the outset, it should be noted that the term "unsafe or unsound," as used in the cease-and-desist provisions of S. 3158, is not a novel term in banking or savings and loan parlance. The words "unsafe" or "unsound" as a basis for supervisory action appear in the banking or savings and loan laws of 38 States. For more than 30 years, "unsafe or unsound practices" have been grounds for removal under section 30 of the Banking Act of 1933 of a director or officer of a member bank of the Federal Reserve System. See 12 U.S.C. 77. It has been grounds since 1935 for the termination of insurance of a bank insured by the Federal Deposit Insurance Corporation.
However, despite the fact that the term "unsafe or unsound practices" has been used in the statutes governing financial institutions for many years, the Board is not aware of any statute, either Federal or State, which attempts to enumerate all the specific acts which could constitute such practices. The concept of "unsafe or unsound practices" is one of general application which touches upon the entire field of the operations of a financial institution. For this reason, it would be virtually impossible to attempt to catalog within a single all-inclusive or rigid definition the broad spectrum of activities which are em-

{{5-31-93 p.A-2210}}braced by the term. The formulation of such a definition would probably operate to exclude those practices not set out in the definition, even though they might be highly injurious to an institution under a given set of facts or circumstances or a scheme developed by unscrupulous operators to avoid the reach of law. Contributing to the difficulty of farming a comprehensive definition is the fact that particular activity not necessarily unsafe or unsound in every instance may be so when considered in the light of all relevant facts. Thus, what may be an acceptable practice for an institution with a strong reserve position, such as concentration in higher risk lending, may well be unsafe or unsound for a marginal operation.
Like many other generic terms widely used in the law, such as "fraud", "negligence", "probable cause" or "good faith", the term "unsafe or unsound practices" has a central meaning which can and must be applied to constantly changing factual circumstances. Generally speaking, an "unsafe or unsound practice" embraces any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance fund.
Financial Institutions Supervisory Act of 1966: Hearings on S. 3158 Before the House Committee on Banking and Currency, 89th Cong., 2d Sess., at 49–50 (1966) (emphasis added).

The phrase "unsafe or unsound banking practice" is widely used in the regulatory statues 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 regulatory agencies. (emphasis added).

Congress has not spoken clearly to what constitutes an unsafe or unsound practice, {{5-31-93 p.A-2211}}leaving the development of the phrase to the (financial institutions) regulatory agencies.

   At the evidentiary hearing, Wholeben testified extensively concerning the examiners' findings and conclusions, the significance of the findings and conclusions, and the remedial measures that would be required to address and correct Respondent's financial, operational and managerial deficiencies. (Tr. 14–104, 125–193, 643–656).
   As of February 4, 1991, Respondent's asset structure consisted of earning assets, primarily loans, and nonearning assets, principally of other real estate owned ("ORE"), which generally is real estate obtained through default foreclosure. (Tr. 31–35). ORE comprised 12 percent of Respondent's assets. (FDIC Ex. 2/7). During the FDIC's examination, Respondent's assets were reviewed and analyzed through the applicable records in accordance with classification techniques and principles set forth in the FDIC's Manual of Examination Policy. Respondent's senior management was also consulted for additional information which would enable the examiners to accurately assess any risk present in Respondent's total asset structure. (Tr. 33–34; FDIC Ex. 1/21-38, 69–108).
   The examiners determined, as reflected in the FDIC's Report of Examination (FDIC Ex. 2), that Respondent had an inordinately high level of assets that were of "substandard quality or worse." (Tr. 34–35). Specifically, it was found that the level of Respondent's loan and ORE assets which were of poor quality had increased precipitously in dollar volume, as a percent of Respondent's total assets, and as a percent of Respondent's capital. (Tr. 40). The increase in the level of poor quality assets occurred since the previous examinations of Respondent conducted by the FDIC and the Florida Department of Banking and Finance. (Tr. 40; FDIC Exs. 2; 3; 4).
   As a consequence of the poor quality of Respondent's loan portfolio, after extensive review and analysis of the underlying loan documentation, Respondent's loan policy (Tr. 47–50; FDIC Exs. 2/17; 11), loan committee minutes, internal watch list of problem loans, and nonaccrual and delinquency reports, adverse classifications were assigned to $15,888,000 of the outstanding loans. (Tr. 35–40).¹¹ The level of Respondent's adversely classified loans is significant in that the total dollar volume of such adversely classified loans equaled 99.4 percent of Respondent's equity capital and 14.62 percent of total loans. (JS ¶21).
   Based on his own opportunity to review and analyze the quality of Respondent's loan portfolio during the examination, Examiner Wholeben concluded that the deterioration in the quality of the loans was caused, primarily, by an overemphasis on collateral and insufficient emphasis on repayment ability of the borrowers, on a failure to develop realistic repayment programs, on violations of Respondent's loan policy (Tr. 44–50; FDIC Ex. 2/17), and, finally, on overlending. (Tr. 42–43).
   In addition to the excessively high volume of poor quality loans, Respondent had acquired an inordinately high level of ORE, much of which was adversely classified during the examination. (Tr. 59–60; JS ¶33, 34).
   As stated above, ORE is primarily real property which has been foreclosed upon by Respondent because the borrower had defaulted in the repayment of the extension of credit. (Tr. 58–59). As of the time of examination, ORE in the cumulative amount of $24,963,000 equaled 12.20 percent of respondent's total assets, of which, $8,839,000

   Wholeben referred to a document which he had prepared, entitled "Major Criticized Assets Per 2-4-91 FDIC Report of Examination," (TR 43) which itemizes Respondent's deficient lending and collection practices into categories. The document is here set forth in full, with check marks in appropriate columns representing the following practices:
   (a) Extending credit to borrowers who lack sufficient repayment ability;
   (b) Extending credit without establishing and/or enforcing adequate and realistic repayment plans;
   (c) Failure adequately to monitor credit extended or failure to initiate timely collection efforts;
   (d) Renewing loans with nominal or no principal reduction;
   (e) Including accrued and unpaid interest in the principal amount of renewed loans;
   (f) Extending credit in violation of bank's written loan policy by (1) failure to comply with procedures for the collection of delinquent loans, (2) allowing the capitalization of interest, (3) failure to conduct adequate credit analysis, and/or (4) overemphasis on collateral.
   (1) Section 23A(a)(1)(B) - Aggregate amount of covered transactions exceeds 20 percent of capital; and,
   (2) Section 23A(c)(4) - Holding company stock prohibited as collateral for loans to affiliates.

   Respondent's excessive concentration of its loans in real estate acquisition, development and construction loans, other real-estate-related transactions, and ORE, which equaled $31,130,000 or 194.67 percent of Respondent's total equity capital as reserves, also resulted from its hazardous lending and lax collection practices. (JS ¶36; FDIC Ex. 2/73). As of February 4, 1991, Respondent's investment concentration included $6,282,000 in adversely classified ORE and $8,537,000 in adversely classified real estate acquisition, development and construction loans, which in the aggregate equaled 47.6 percent of Respondent's investment concentration. (JS ¶36; 37; FDIC Ex. 2/73; Tr. 50).

   The examination also analyzed the efficiency of Respondent's allowance for loan and lease losses. (Tr. 51–58). The purpose of this allowance is to absorb potential losses, as well as other unrecognized or unanticipated losses in loans and leases. (JS ¶58, 51). Approximately 50 percent of loans adversely classified "Doubtful," and 18 percent of loans adversely classified "substandard," equaled $2,874,880 or 246.77 percent of Respondent's allowance for loan and lease losses.¹³ (Tr. 52–54). Respondent's allowance for loan and lease losses was particularly inadequate in relation to the excessive risk inherent in its loan portfolio. (Tr. 42; FDIC Ex. 2/5). Respondent's allowance for loan and lease losses in the amount of $1,165,000 equaled only the inadequate cushion of 6.59 percent of its total overdue loans and only 13.84 percent of Respondent's nonaccrual loans. (JS ¶35).

   As of February 4, 1991, Respondent's loans to its officers and directors and their related business interests had increased in both dollar volume and as a percent of total loans. (Tr. 66–68). The loans to officers and directors increased from $10,989,000 as reflected in the Report of Examination prepared by the Florida Department of Banking and Finance as of December 31, 1989 (FDIC Ex. 3), to $16,052,000 or 15 percent of total loans (Tr. 67). This represented an increase from 11 percent of total loans on December 31, 1989, to 15 percent of total loans as of February 4, 1991. (FDIC Ex. 2/2, 82–83). Moreover, and most alarming, of Respondent's loans to directors and officers and their related interests, as of February 4, 1991, $4,148,000 or 26 percent was adversely classified during the examination. (FDIC Ex. 2/2, 82–83).

   The examination of Respondent as of February 4, 1991, reviewed whether Respondent's management had effectively supervised its business and affairs. The examiners paid particular attention to ability to manage daily business and to effectively plan Respondent's business to adjust to changes in the local economy. (Tr. 66–70; FDIC Ex. 2/2-5). Management's implementation of past recommendations contained in the various Reports of Examination was also reviewed, and it was determined that although attempts were made (TR 305, 343), Respondent's management had failed to implement prior warnings to diversify Respondent's loan portfolio which would, necessarily, have reduced the number and volume of real estate loans and real-estate-related transactions (Tr. 69–70). By failing to diversify the loan portfolio and by continuing to engage in hazardous lending and lax collection practices, Respondent's management failed to take "positive action to reverse the noted deterioration in asset quality." (Tr. 69–70).

   1. Deference to Examiners' Conclusions
   In assessing the weight and deference to be given to expert witnesses, such as these FDIC examiners, the courts have uniformly recognized that a determination of expertise is primarily a function of a witness' experience in a given area. In Moran v. Ford Motor Company, 476 F.2d 289, 291 (8th Cir. 1973), the Court determined that the relevant inquiry into a witness' qualification as an expert is whether the witness' training and experience demonstrates a significant knowledge of the subject matter. See also, Boleski v. American Export Lines, Inc., 385 F.2d 69, 72 (4th Cir. 1967); and Jenkins v. United States, 307 F.2d 637, 644 (D.C. Cir. 1962).
   In Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986) the Circuit Court of Appeals concluded that FDIC bank examiners' unique experience leads to the conclusion that certain of their determination are entitled to great deference and cannot be overturned unless shown to be arbitrary and capricious or outside a "zone of reasonableness." The court in Sunshine adopted in whole a statement by the FDIC Board of Directors on the deference that should be given to FDIC examiners. The opinion states that:

Although there are no court opinions addressing the weight to be given examiners' loan classifications, 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.
....
Congress has instructed this Board to "appoint examiners", and has provided that "[e]ach examiner shall have power to make a thorough examination of all of the affairs of Respondent 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 examiners are appointed as "commissioned examin-

ers", 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 commissioner examines is entitled to deference, and should not be disregarded in the absence of compelling evidence that it is without rational basis.

[I]n making [judgments], the examiner must look at the underlying facts, evaluate those facts and, then, based on these facts, make a predictive judgment concerning the likelihood of repayment. If that predictive judgment is based on facts in evidence (which are subject to an ALJ's review), and if the predictive judgment is not arbitrary or capricious, or outside the zone of reasonableness, it may not be displaced by the ALJ. This is the conclusion of the Sunshine [State Bank] decision. 783 F.2d 1583-4.
____ Id. at A-1734.4¹⁴

H. Excessive Transactions with Affiliates

   In addition to having engaged, engaging, and being about to continue engaging in unsafe and unsound banking practices, FDIC Enforcement counsel allege that Respondent had engaged, etc., in a violation of Section 23A of the Federal Reserve Act, 12 U.S.C. §371c, which in pertinent part restricts Respondent from engaging in a covered transaction with an affiliate, as those terms are defined in Subpart (b), Definitions.
   There is no dispute that The American Bancorporation of the South, of Merritt Island, Florida, is a bank holding company holding all of the authorized and outstanding shares of Respondent's stock (JS 8) and that they are affiliated, as are Sisoro, Inc., of Merritt Island, Florida; C&R Joint Ventures, Inc., of Cocoa, Florida; and Southern Capital Corporation, of Merritt Island, Florida. It is also undisputed that G. Leonard Gioia, Sebron Kay, Rodney Ketcham, Arnold Liberman, Morris A. Rowe, and Ruth K. Smith, are also affiliates.
   The parties disagree, however, as to whether Merritt Capital Corporation ("Merritt Capital"), of Cocoa, Florida, was an affiliate even though listed as an affiliate on the Rowe's Questionnaire, part of the Report of Examination, FDIC Ex 2/23 and 30. Respondent points out that all of the voting stock of that entity is owned by Rowe's mother, while he owns only nonvoting stock. 12 U.S.C. §371(c)(b)(3)(A) limits control to three alternative tests:
   (i) such company or shareholders, directly or indirectly, or acting through one or more other persons owns, controls, or has power to vote 25 percentum or more of any class of voting securities of the other company;
   (ii) such company or shareholder controls in any manner the election of a majority of the directors or trustees of the other company; or
   (iii) the Board determines, after notice and opportunity for hearing, that such company or shareholder, directly or indirectly, exercises a controlling influence over the management or policies of the other company ...
   As Respondent argues, since the "voting stock ownership" test does not apply to Rowe, the issue devolves to the question of whether Rowe "controls in any manner the election of a majority of the directors or trustees of" Bancorporation, or "directly or indirectly, exercises a controlling influence over the management or policies of" Bancorporation.¹⁸
   As evidence of affiliated status, FDIC Enforcement counsel relies solely on its Exhibit 2, the February 24, 1991 Report of Examination, and referred to pages 23 and 30. On page 23, certified by Rowe, question 25 reads as follows:

List the name of any corporation, business trust, association, or other similar organization which is affiliated with the bank, either directly or indirectly in any manner, including those arising from fiduciary relationships.

   Respondent asserts by way of affirmative defense that its directors have voluntarily "adopted, implemented and are currently pursuing a comprehensive compliance plan" and, thus, the issuance of an Order to Cease and Desist against Respondent would be excessive and unwarranted. Respondent has failed to implement effective remedial measures as of February 4, 1991. (Tr. 64, 70, 73–74).
   Respondent's proposal of one more escape from administrative regulation by a plan of future self remediation is no solution to the situation. The overwhelming majority of the courts have consistently held that the discontinuance of illicit practices or violations of law is not a defense against the issuance of a cease and desist order.²⁰ This was expressed many years ago in Clinton Watch Company v. Federal Trade Commission, 291 F.2d 838 (7th Cir. 1961) cert. denied, 368 U.S. 952 (1962):

[V]oluntary discontinuance of an unfair trade practice does not necessarily preclude issuance of a cease and desist order. The order to cease and desist from an abandoned unlawful practice is in the nature of a safeguard for the future.

[W]hether or not such practices have actually been abandoned can only be determined through subsequent enforcement procedures. Hence, ... there is not valid assurance that if Zale were free of the Commission's restraint it would not continue its former course.

[D]etermination of whether the offensive practices have actually been abandoned by the Bank is appropriately made through subsequent enforcement proceedings. Without its Cease and Desist Order, the FDIC has "no valid assurance that if [the bank] were free from the [FDIC's] restraint it would not continue its former course." (Citations omitted). (766 F.2d at 178.)

[A]n order is an appropriate instrument to deter and prevent future abuses, to correct conditions which have resulted from unsafe and unsound practices and violations, and to protect the shareholders of the Bank and insure their security in the future. The flagrant and numerous abuses and violations...would justify the issuance of an order to insure their nonoccurrence in the future. (770 F.2d at 82–83.)

[T]he record in this proceeding indicates that most of these violations of law were corrected by the Insured Institution during or shortly after the examination period. However, the fact of correction does not excuse or eliminate the fact that the violations of law occurred. Nor does correction necessarily eliminate the need for appropriate relief in the form of an order not to commit such violations in the future. A cease-and-desist order is intended to be remedial in nature, to halt unsafe or unsound practices or violations of law. To the extent that correction of the violation has occurred, evidence of that fact goes to compliance with the relief ordered in the proceeding.

   The short of it is that the cessation of unsafe or unsound practices and violations of law and regulations does not deprive the FDIC of the authority to issue an Order to Cease and Desist based on Respondent's previous practices and condition. Evidence regarding Respondent's practices which occurred after the period covered by the February 4, 1991 FDIC Report of Examination will not rebut the occurrence of the practices and violations upon which the Notice was predicated. Even if Respondent's condition has improved, there is still a need for a formal order based on Respondent's previous practices and condition because, without such an order, there is no assurance that it will not again engage in unsafe or unsound prac-

[I]t is clear that the Insured Institution's condition need not deteriorate to the point that it is on the verge of insolvency before it may be found to have engaged in unsafe or unsound banking practices.

   Respondent's officers and directors have not been able to effectively and forcefully correct Respondent's severe financial problems. Accordingly, only a formal corrective program implemented by the FDIC through an Order to Cease and Desist can reverse Respondent's obviously deteriorating financial condition.

   As evidenced by a series of examinations, Respondent's condition has declined over a short period of time. Its capital ratios are reduced, its asset structure is becoming overloaded with nonproducing loans and foreclosed real estate and is highly concentrated, it engages in capitalization of interest, its credit to officers and directors is increasing and highly adversely classified with interest capitalized, its allowance for losses is at a low level, and it has engaged in excessive transactions with affiliates. All of these practices, and more, have led to reduced earnings, increased overhead costs, poor capital ratios, low loss allowances, and other signposts which have pointed to a conclusion, by the chain of expert examination and review to which defence must be given, that administrative action is required for the protection of Respondent and its depositors, and of the integrity of the nation's banking system. After a prior recommendation of an informal Memorandum of Understanding of affirmative actions to be taken was rejected by Respondent, which attempted self-remediation not resulting in satisfactory improvements, the issuance of a formal Cease and Desist Order, with affirmative remedial provisions, is appropriate.

   Respondent has admitted certain of the following proposed findings of fact either in its Answer or in the Joint Stipulations of Fact and Law. These findings of fact, as to which there is no dispute, are supported herein by references to Respondent's Answer or to the Joint Stipulations of Fact and Law. The remaining proposed findings of fact, which were not admitted by Respondent, are supported by appropriate references to the hearing transcript and/or to the applicable hearing exhibits. Many of the facts presented by Respondent are irrelevant and immaterial to the issues and are not reported.

   (a) To act as a cushion to protect the bank from the risks of loss inherent in the banking business;
   (b) To absorb losses so that the bank can continue to operate during periods when the bank is sustaining losses; and
   (c) To provide a measure of assurance to the public that the bank will be able to continue to provide financial services. (JS ¶64; Tr. 91).

   15. Respondent's adjusted capital and reserves as a percent of adjusted total assets declined from 8.18 percent as of December 31, 1989, to 7.73 percent as of December 31, 1990. (JS ¶18).    16. As of February 4, 1991, the Bank required capital necessary and sufficient to absorb losses commensurate with the amount of total assets, the volume of adversely classified assets, earnings and overhead expenses. (JS ¶64; FDIC Ex. 2/5).    17. As of February 4, 1991, Respondent's equity capital level was inadequate due to the precipitous increase in adversely classified assets, weak earnings, high overhead and an inadequate allowance for loan and lease losses. (Tr. 32; FDIC Ex. 2/5).

   (a) Respondent's total adversely classified assets, consisting of loans and leases and ORE, equaled $24,727,000;
   (b) Respondent's contingent liabilities adversely classified equaled $869,000;
   (c) Respondent's total adversely classified assets equaled 12.09 percent of Respondent's total assets; and
   (d) Respondent's adversely classified items, consisting of adversely classified assets and adversely classified contingent liabilities, equaled 160.07 percent of Respondent's total equity capital and reserves. (JS ¶20; FDIC Ex. 2/7).

   (a) Respondent's adversely classified loans and leases, which comprised the largest portion of Respondent's total adversely classified assets, equaled $15,888,000, consisting of $15,841,000 adversely classified "Substandard" and $47,000 adversely classified "Doubtful;" and
   (b) Respondent's adversely classified loans and leases equaled 14.62 percent of Respondent's total loans and leases or 99.4 percent of Respondent's total equity capital and reserves. (JS ¶21; FDIC Ex. 2/7).

   (a) Respondent's adversely classified ORE equaled $8,839,000, consisting of $8,814,000 adversely classified "Substandard" and $25,000 adversely classified "Loss," and
   (b) Respondent's adversely classified ORE equaled 35.41 percent of Respondent's total ORE. (JS ¶22; FDIC Ex. 2/7).

   (a) The Bank had 159 loans in the aggregate amount of $17,687,000 which were overdue 30 days or more;
   (b) Of Respondent's overdue loans, 114 loans in the aggregate amount of $11,600,000 were overdue 30–89 days and 45 loans in the aggregate amount of $6,086,000 were overdue 90 days or more; and
   (c) Respondent's overdue loans were 16.14 percent of Respondent's gross loans. (JS ¶23; Tr. 44–47; FDIC Ex. 2/75).

   (a) The dollar volume of Respondent's adversely classified items has increased from $12,728,000 as shown in the FDIC Report of Examination of the Bank as of December 31, 1988, to $16,094,000 as of December 31, 1989, to $25,596,000 as of February 4, 1991;
   (b) The percent of Respondent's adversely classified items to total equity capital and reserves has increased from 82.5 percent as shown in the FDIC Report of Examination of Respondent as of December 31, 1988, to 95.72 percent as of December 31, 1989, to 160.07 percent as of February 4, 1991; and
   (c) The percent of Respondent's adversely classified assets to total assets has increased from 8.44 percent as shown in the State Report of Examination of Respondent as of December 31, 1989, to 12.09 percent as of February 4, 1991. (JS ¶26; Tr. 39, 42; FDIC Exs. 2/7; 3/8; 4/8).

   (a) The dollar volume of Respondent's adversely classified loans has increased from $9,308,000 as shown in the FDIC Report of Examination of Respondent as of December 31, 1988, to $12,859,000 as of December 31, 1989, to $15,888,000 as of February 4, 1991;
   (b) The percent of Respondent's adversely classified loans to total equity capital and reserves has increased from 63.6 percent as shown in the FDIC Report of Examination of Respondent as of December 31, 1988, to 74.51 percent as of December 31, 1989, to 99.4 percent as of February 4, 1991; and
   (c) The percent of Respondent's adversely classified loans to total loans has increased from 13.05 percent as shown in the State Report of Examination of Respondent as of December 31, 1989, to 14.62 percent as of February 4, 1991. (JS ¶28; FDIC Exs. 2/7; 3/8; 4/8).

   26. Nonaccrual loans are loans not accruing interest because full payment of principal or interest is not expected, or where principal or interest has been in default for 90 days or more, unless the obligation is both well secured and in the process of collection. (Tr. 44–47; FDIC Ex. 1/92-93).
   27. As of February 4, 1991, Respondent had 46 loans in the aggregate amount of $8,420,000 or 7.68 percent of gross loans or 4.18 percent of total assets which were in a nonaccrual status. (JS ¶24; FDIC Ex. 2/75).
   28. As of February 4, 1991, Respondent was accruing interest on 13 loans in the aggregate amount of $214,000 which were overdue 90 days or more. (JS ¶25; FDIC Ex. 2/75).
   29. As of February 4, 1991, Respondent had outstanding extensions of credit to the following individuals or entities in the specified amounts which were in a nonaccrual status:

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   (JS ¶46; FDIC Ex. 2/63-64).
   30. A high volume of past due and nonaccrual loans indicates the probability of future loan losses. (Tr. 44–47).

   F. Increase in Overhead Expenses
   31. Respondent's overhead expenses as a percent of Average Assets have increased from 4.42 percent as of December 31, 1989, to 5.0 percent as of December 31, 1990. (JS ¶30; FDIC Ex. 2/12).
   32. As of February 4, 1991, Respondent had been operated with excessively high overhead expenses. (FDIC Ex. 2/4).

   (a) 100 percent of the amount of loans adversely classified "Loss;"
   (b) 50 percent of the amount of loans adversely classified "Doubtful;"
   (c) 10 percent of the amount of loans adversely classified "Substandard;" and
   (d) One percent of the amount of all other loans. (Tr. 51–57).

   52. Respondent's earnings declined during the years 1989 and 1990. (Tr. 60–64; FDIC Ex. 2/12, 78). Respondent's net income after tax decreased from $2,443,000 in 1989 to $1,057,000 in 1990, or from 1.32 percent of Average Assets to 0.52 percent of Average Assets as of December 31, 1990. (JS ¶32).
   53. Respondent's average earning assets as a percent of Average Assets declined from 83.24 percent in 1988 to 79.48 percent in 1989 to 72.20 percent in 1990. (JS ¶38; FDIC Ex. 2/4).
   54. Respondent's poor earnings and earnings prospects result from Respondent's hazardous lending and lax collection practices, which caused a significant reduction in earning assets. (FDIC Ex. 2/4).

   (a) The dollar volume of Respondent's ORE has increased from $12,467,000 as shown in the State Report of Examination of Respondent as of December 31, 1989, to $24,963,000 as of February 4, 1991; and
   (b) The percent of Respondent's ORE to total assets has increased from 6.5 percent as shown in the State Report of Examination of Respondent as of December 31, 1989, to 12.20 percent as of February 4, 1991. (JS ¶33).

   (a) The dollar volume of Respondent's adversely classified ORE has increased from $1,255,000 as shown in the FDIC Report of Examination of Respondent as of December 31, 1988, to $8,839,000 as of February 4, 1991;
   (b) The percent of Respondent's adversely classified ORE to total ORE has increased from 16.0 percent as shown in the FDIC Report of Examination of Respondent as of December 31, 1988, to 35.41 percent as of February 4, 1991; and
   (c) The percent of Respondent's adversely classified ORE to total equity capital and reserves has increased from 8.6 percent as shown in the FDIC Report of Examination of Respondent as of December 31, 1988, to 55.30 percent as of February 4, 1991. (JS ¶34).

   (JS ¶37; FDIC Ex. 2/63-64).
   59. As of February 4, 1991, Respondent had acquired ORE in the specified amounts through foreclosure proceedings following default by the borrowers in the repayment of the outstanding extensions of credit:

   (JS ¶48; FDIC Ex. 2/65-69).
   60. As of February 4, 1991, Respondent's wholly-owned subsidiary, American Mortgage Corporation, had acquired ORE in the specified amounts through foreclosure proceedings after default by the borrowers in the repayment of the outstanding extensions of credit:

   (JS ¶49; FDIC Ex. 2/71).
   J. Excessive Investment Concentration in Acquisition, Development and Construction Loans and Related Transactions
   61. As of February 4, 1991, Respondent's investment concentration in acquisition, development and construction loans, ORE and other real-estate-related transactions equaled $31,130,000 of 194.67 percent of Respondent's total equity capital and reserves. (JS ¶36; FDIC Ex. 2/73).
   62. As of February 4, 1991, Respondent's investment concentration in acquisition, development and construction loans, ORE and other real-estate-related transactions in the cumulative amount of $31,130,000 included $6,282,000 in adversely classified ORE and $8,527,000 in adversely classified acquisition, development and construction loans which equaled, in the aggregate, 47.6 percent of this investment concentration. (JS ¶37; FDIC Ex. 2/73).
   63. During the period December 31, 1988, to February 4, 1991, Respondent concentrated its lending activities in asset based real estate loans consisting of commercial and residential real estate loans and acquisition, development and construction loans. (JS ¶39).
   64. As of February 4, 1991:

   (a) 83.10 percent of Respondent's loan portfolio was concentrated in commercial and residential real estate loans and acquisition, development and construction loans; and
   (b) $31,130,000 or 194.67 percent of Respondent's total equity capital and reserves was invested in acquisition, development and construction loans, ORE and other real-estate-related transactions, of which $14,819,000 or 47.6 percent was adversely classified. (JS ¶40).

   (a) G.R. Griffin and related loans;
{{5-31-93 p.A-2227}}
   (b) Val M. Steele;
   (c) Diversified Land Association, Inc.; and
   (d) Colorado Corporation. (JS ¶41).

   (a) It may cause Respondent to inflate its net interest margin;
   (b) It may cause Respondent to overstate its earnings and capital accounts;
   (c) It may cause Respondent to understate its loan delinquencies;
   (d) It may cause Respondent to delay the recognition of its problem assets; and
   (e) It may cause Respondent to understate the appropriate amount of its allowance for loan and lease losses. (FDIC Ex. 1/92-93).

   68. The ratio of adversely classified loans to total loans measures the percent of Respondent's loan portfolio that is more susceptible to a risk of loss. (Tr. 31–42).
   69. The ratio of adversely classified assets to total assets measures the percent of Respondent's total assets that are susceptible to a risk of loss. Tr. 31–42).
   70. Following a review of a bank's documents and records and discussions with a bank's management, FDIC examiners review loans and other assets and either pass the asset (i.e., do not assign an adverse classification) or assign an adverse classification depending on the degree of risk of loss that may be present. (Tr. 35–36; FDIC Ex. 1/88-90).
   71. Adversely classified loans or a portion thereof are allocated on the basis of risk into three categories:

   (a) Substandard - Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Respondent will sustain loss if the deficiencies are not corrected.
   (b) Doubtful - Loans classified Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
   (c) Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. (JS ¶60; Tr. 36–39; FDIC Ex. 1/90-92).

   (JS ¶54; FDIC Ex. 2/19, 23, 30).
   102. As of February 4, 1991, Respondent had outstanding extensions of credit to the below-designated individuals in the referenced amounts, which extensions of credit were secured by the capital stock of Respondent's affiliate, The American Bancorporation of the South, Merritt Island, Florida, a bank holding company:

   (JS ¶53; FDIC Ex. 2/19).
   103. As of February 4, 1991, Respondent's extensions of credit to its affiliates described in paragraph 101 above and to the individuals who pledged securities of Respondent's affiliate described in paragraph 102 above in the cumulative amount of $3,580,000 exceeded $3,198,000, which was the maximum allowable 20 percent of Respondent's capital stock and surplus specified in paragraph 13 above. (JS ¶69; FDIC Ex. 2/19). Even excluding $104,000 in extensions of credit to Merritt Capital Corporation would result in exceeding the maximum.
   104. As of February 4, 1991, Respondent accepted securities of its affiliate, The American Bancorporation of the South, Merritt Island, Florida, Respondent's parent bank holding company, as collateral security for extensions of credit to Respondent's other affiliates, C&R Joint Ventures, Inc. and Southern Capital Corporation. (JS ¶69; FDIC Ex. 2/19).
O. Increase in the Level of Extensions of
Credit to Officers and Directors
   105. The level of Respondent's loans to directors and officers and their related business interests has increased in both dollar volume and as a percent of total loans as follows:

   (a) The dollar volume of Respondent's loans to its directors and officers and their related interests has increased from $10,989,000 as reflected in the State Report of Examination of Respondent as of December 31, 1989, to $16,052,000 as of February 4, 1991;
   (b) Respondent's loans to directors and officers and their related business interests as a percent of total loans has increased from 11 percent as reflected in the State Report of Examination of Respondent as of December 31, 1989, to 15 percent as of February 4, 1991; and
   (c) Of Respondent's loans to directors and officers and their related business interests in the amount of $16,052,000, as reflected in the FDIC Report of Examination of Respondent as of February 4, 1991, $4,148,000 or 26 percent was classified "Substandard." (FDIC Ex. 2/2, 82-83).

   106. During the period between the FDIC Examination of Respondent as of December 31, 1988, and the FDIC Examination of Respondent as of February 4, 1991, the efforts of Respondent's management to prevent further deterioration in Respondent's loans not previously adversely classified proved unsuccessful. (FDIC Ex. 2/2-5; Tr. 73–74).
   107. A contributing factor to Respondent's excessive level of adversely classified loans and adversely classified ORE, as well as the excessively high volume of nonclassified ORE, was Respondent management's poor credit administration practices and fail- {{5-31-93 p.A-2231}}ure to recognize the extent of the problems in Respondent's loan portfolio in order to take prompt corrective action. (FDIC Ex. 2/2-5; Tr. 73–74).
   108. Respondent had extended credit to officers, directors and their related interests whose extensions of credit were adversely classified by the FDIC examiners in the cumulative amount of $4,148,000 at the FDIC examination of Respondent as of February 4, 1991. The directors' extensions of credit which were adversely classified comprised 26 percent of total adversely classified extensions of credit. (FDIC Ex. 2/2).
   109. Respondent has been operated with management whose policies and practices have been detrimental to Respondent and jeopardize the safety of Respondent's deposits. (FDIC Ex. 2/2-5, Tr. 73–74, 212).
   110. The policies and practices of Respondent's management that have been detrimental to Respondent and that have jeopardized Respondent's deposits are contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk of loss or other damage to Respondent. (FDIC Exs. 1/109; 2/2-5; Tr. 14–104).
   111. Respondent has been operated with a board of directors which has failed to provide adequate supervision of and direction to the active management of Respondent so as to prevent the occurrence of unsafe or unsound practices and violations of law. (FDIC Ex. 2/2-5; Tr. 14–104).
   112. The failure of Respondent's board of directors to provide adequate supervision and direction to the active management of Respondent is contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to such bank, its shareholders, or the agencies administering the insurance funds. (FDIC Ex. 2/2-5; Tr. 14–104).
   113. Despite warnings at previous examinations, Respondent's management did not undertake appropriate remedial actions to correct Respondent's hazardous and imprudent lending and operating practices. (FDIC Exs. 2; 3; 4; Tr. 69, 73–74).
   114. Respondent's officers and directors deviated from normal and accepted banking practices by:
   (a) engaging in hazardous lending and lax collection practices (FDIC Ex. 6; Tr. 43–44);
   (b) maintaining an excessive volume of poor quality loans and other assets in relation to total assets and in relation to equity capital (Tr. 34–35);
   (c) maintaining an excessive volume of overdue loans (Tr. 44–47);
   (d) maintaining an excessive volume of nonaccrual loans (Tr. 44–47);
   (e) maintaining an excessive volume of adversely classified loans and adversely classified ORE (Tr. 35–40);
   (f) maintaining a high volume of ORE (Tr. 59–60);
   (g) maintaining an excessive volume of adversely classified contingent liabilities (FDIC Ex. 2/7, 72);
   (h) engaging in practices which produced inadequate operating income (Tr. 60–66);
   (i) operating with excessively high overhead expenses (Tr. 60–66);
   (j) engaging in practices which produced a significant reduction in earning assets and operating income (Tr. 60–66);
   (k) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held (Tr. 51–58);
   (l) failing to provide for an adequate diversification of risk in the investment of funds (Tr. 66–68);
   (m) operating with a loan policy which is inadequate for the volume, kind and quality of loans held (FDIC Ex. 2/17);
   (n) permitting violations of applicable Federal banking law (FDIC Ex. 2/19);
   (o) engaging in policies and practices which are detrimental to Respondent and jeopardize the safety of Respondent's deposits (Tr. 14–104, 643–656, 195–283, 588–643); and
   (p) failing to provide adequate supervision over and direction of Respondent to prevent unsafe or unsound banking practices. (Tr. 14–104, 643–656, 195–283, 588–643).
   115. The deviation by Respondent's officers and directors from normal and accepted banking practices described in paragraph 114 above increased the risk of financial loss and other damage to Respondent. (Tr. 46).
{{5-31-93 p.A-2232}}

   116. FDIC examiners assign to each bank a uniform composite rating based on an evaluation of component financial operational criteria. The rating is based on a sale of 1 to 5 in ascending order of supervisory concern. "Problem" banks are those institutions with financial, operational or managerial weaknesses that threaten their continued financial viability. Depending upon the degree of risk and supervisory concern, these banks are rated either "4" or "5" under the Uniform Financial Institutions Performance Rating System. (JS ¶63; FDIC Ex. 1/18-22).

   117. As of February 4, 1991, Respondent's financial components and managerial adequacy were rated based on the Uniform Financial Institutions Rating System. The specific components evaluated included capital adequacy, asset quality, management, earnings and liquidity. On the basis of the rating for each separate component, each of which was accorded a numerical rating on a scale of 1 to 5 in ascending order of supervisory concern, a composite rating was assigned to Respondent. (FDIC Ex. 2/6, 43).

   118. The FDIC assigned Respondent a Uniform Composite Rating of 4 at the conclusion of the February 4, 1991 FDIC examination. (FDIC Ex. 2/6).

   119. A Uniform Composite Rating of 4 is defined in the FDIC Statement of Policy entitled "Uniform Financial Institutions Rating System" as follows:

Institutions in this group have an immoderate volume of serious financial weaknesses of a combination of other conditions that are unsatisfactory. Major and serious problems or unsafe or unsound conditions may exist which are not being satisfactorily addressed or resolved. Unless effective action is taken to correct these conditions, they could reasonably develop into a situation that could impair future viability, constitute a threat to the interests of depositors and/or pose a potential for disbursement of funds by the insuring agency. A higher potential for failure is present but is not yet imminent or pronounced. Institutions in this category require close supervisory attention and financial surveillance and a definitive plan for corrective action. (FDIC Exs. 1/20-22; 2.6).

   127. Less than 4 per cent by number of the loans adversely classified by the FDIC at its February 4, 1991 examination were credits newly extended after the 1988 adoption of a restrictive lending program. adversely classified by the FDIC at its February 4, 1991 were fully funded at the time of the December 31, 1988 examination. 60 per cent of the loans adversely classified by the FDIC at its February 4, 1991 examination were fully funded at the time of the December 31, 1988 examination, but were not found to have any underwriting deficiencies so as to merit an adverse classification at the 1988 examination, and 10 per cent of the loans adversely classified by the FDIC at its February 4, 1991 examination were adversely classified at the December 31, 1988 examination.
   129. Net loan losses in 1991 were $398,000, or approximately 34% of the $1,165,000 allowance for loan losses as of December 31, 1990.
   130. The bank has made non-real estate loans over the past few years, some of which loans have led to large losses.

   6. The opinions and conclusions of FDIC examiners concerning adverse classification of loans and other assets are entitled to great weight and deference, unless the opinions are shown to be arbitrary or capricious or outside a zone of reasonableness. Sunshine State Bank v. Federal Deposit Insurance Corporation, 783 F.2d 1580 (11th Cir. 1986).
   7. The opinions and conclusions of FDIC examiners concerning the quality and efficacy of bank operating policies and the risks associated with specific bank practices are entitled to great weight unless the opinions and conclusions are shown to be arbitrary or capricious or outside a zone of reasonableness.
   8. The opinions and conclusions of FDIC examiners concerning the quality of a bank's active management and the quality of such management's policies and practices are entitled to great weight, unless such opinions and conclusions are shown to be arbitrary or capricious or outside a zone of reasonableness.
   9. The opinions and conclusions of FDIC examiners concerning the quality of a bank's board of directors and its policies are entitled to great weight, unless such opinions and conclusions are shown to be arbitrary or capricious or outside a zone of reasonableness.

   10. An "unsafe or unsound banking practice" embraces any action or lack of action which is contrary to generally accepted standards of prudent bank operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds. (JS ¶59).
   11. As a result of the actions, practices and/or omissions of Respondent's employees, officers and directors as of February 4, 1991, relative to Respondent's loans and other extensions of credit, Respondent had engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by engaging in hazardous lending and lax collection practices by:

   (a) extending credit to borrowers who lack sufficient repayment ability;
   (b) extending credit without establishing and/or enforcing adequate and realistic repayment plans;
   (c) failing adequately to monitor credit extended, including previously unclassified credit, and failing to initiate timely collection efforts;
   (d) renewing loans with nominal or no principal reduction;
   (e) including accrued and unpaid interest in the principal amount of renewed loans; and
   (f) extending credit in violation of Respondent's established loan policy.

   (a) operating with excessively high overhead expenses;
   (b) experiencing a significant reduction in earning assets;
   (c) experiencing a significant reduction in net operating income; and
   (d) acquiring an excessively high volume of ORE.

   (a) the method for determining the allowance for loan and lease losses;
   (b) the adequate mix of the loan portfolio;
   (c) the practices and procedures for dealing with adversely classified borrowers;
   (d) procedures for reducing stagnant lines of credit;
   (e) procedures for reducing concentrations of credit and improving risk diversification;
   (f) procedures for approving and administering loans to and/or for the benefit of officers and directors and their related interests;
   (g) procedures for managing ORE; and
   (h) procedures for the utilization of interest financing and interest reserve funding.

   (a) Merritt Capital Corporation
Cocoa, Florida;
   (b) Sisoro, Inc.
Merritt Island, Florida;
   (c) C&R Joint Ventures, Inc.
Cocoa, Florida; and
   (d) Southern Capital Corporation
Merritt Island, Florida.

   38. The FDIC has broad discretionary authority to fashion appropriate remedies under section 8(b) of the Act, 12 U.S.C. §1818(b), to address adverse conditions resulting from unsafe or unsound banking practices and violations of law.
   39. The purpose of an Order to Cease and Desist is to rehabilitate Respondent by providing an enforceable operating plan to eliminate unsafe or unsound practice and violations of law and to correct the adverse conditions resulting therefrom.
   40. The relief sought by the FDIC against Respondent in this proceeding is reasonably related to the unsafe or unsound practices and violations of law engaged in by Respondent.
   41. The FDIC is entitled to an Order to Cease and Desist against Respondent pursuant to section 8(b) of the Act, 12 U.S.C. §818(b), in the form proposed by the FDIC because the affirmative provisions of such {{5-31-93 p.A-2237}}Order to Cease and Desist are supported by a preponderance of the evidence on the record in this proceeding. (FDIC ex. 28).
   42. The improvement in the condition of Respondent and/or the cessation of unsafe or unsound banking practices and violations of law does not negate the necessity for the issuance of an Order to Cease and Desist against Respondent in this proceeding.

   Pursuant to the provisions of section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(b), an Order in the form recommended and attached hereto and made a part hereof should issue against Respondent, Requiring Respondent to cease and desist from engaging in the unsafe and unsound practices, and violation of statute, as found herein, and to correct adverse conditions resulting therefrom.
/s/ Walter J. Alprin
Administrative Law Judge
Office of Financial Institution
Adjudication

In the Matter of
THE AMERICAN BANK OF THE
SOUTH
MERRITT ISLAND, FLORIDA
(Insured State Nonmember Bank)

Docket No.
FDIC-92-17b

   The Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") having considered the record and the applicable law, finds and concludes that The American Bank of the South, Merritt Island, Florida ("Bank"), as set forth in this Decision, has engaged in unsafe or unsound banking practices and violations of law 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 Bank, its institution-affiliated parties, as such term is defined in section 3(u) of the Act, 12 U.S.C. §1813(u), and its successors and assigns cease and desist from the following unsafe or unsound banking practices and violations of laws:
   A. Failing to provide adequate supervision and direction over the affairs of the Bank by the board of directors of the Bank to prevent unsafe or unsound practices and violations of laws;
   B. Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   C. Operating the Bank with an excessive volume of adversely classified assets;
   D. Maintaining an excessive volume of nonearning assets;
   E. Engaging in practices which produce inadequate operating income and excessive loan losses;
   F. Failing to adopt and implement provisions for the adequate diversification of risk in the Bank's investment of funds;
   G. Failing to provide and maintain an adequate allowance for loan and lease loses for the volume, kind and quality of loans held by the Bank;
   H. Engaging in violations of applicable laws, as more fully described on page 6-a of the FDIC's Report of Examination of the Bank as of February 4, 1991;
   I. Failing to operate the Bank with adequate internal controls and accounting systems to prevent unsafe and unsound practices; and
   J. Engaging in hazardous lending and ineffective and lax collection practices, including but not limited to: (i) failing to provide an adequate loan policy for the Bank; (ii) extending credit to borrowers who lack sufficient repayment ability; (iii) failing to provide an adequate loan review and grading system; (iv) extending credit without adequate diversification of risk; and (v) failing to enforce repayment programs.
   IT IS FURTHER ORDERED that the Bank and its successors and assigns take affirmative action as follows:

1. (a) Within 90 days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include a chief executive officer with proven ability in managing a bank of comparable size and a qualified senior loan officer having an appropriate level of lending, collection and loan supervision experience necessary to supervise the upgrading of a low quality loan portfolio. Such per- {{5-31-93 p.A-2238}}sons shall be provided the necessary written authority to implement the provisions of this ORDER. The qualifications of management shall be assessed on its ability to (i) comply with the requirements of this ORDER, (ii) operate the Bank in a safe and sound manner, (iii) comply with applicable laws and regulations, and (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings and management effectiveness. So long as this ORDER remains in effect, the Bank shall notify the Regional Director of the FDIC's Atlanta Regional Office ("Regional Director") in writing of any changes in management. Such notification shall be in addition to any application and prior approval requirements established by section 32 of the Act, 12 U.S.C. §1831i, and implementing regulations; must include the names and qualifications of any replacement personnel; and must be provided at least 30 days prior to the individual assuming the new position.
   (b) To ensure both compliance with this ORDER and the retention of qualified management by the Bank, the board of directors shall, within 90 days from the effective date of this ORDER, develop a written analysis and assessment of the Bank's management and staffing requirements ("Management Policy"), which shall, at a minimum, contain: (i) an analysis of the number and type of positions needed to properly manage the Bank; (ii) a clear and concise description of the required experience and level of compensation for each such position; (iii) an evaluation of each member of the Bank's present management; (iv) a plan to recruit and hire any replacement personnel with the requisite ability and experience necessary to fill management positions at the Bank; (v) a periodic evaluation of each Bank employee's job performance; and (vi) procedures to periodically review and update the Management Policy. The Management Policy and any subsequent modification thereto shall be submitted to the Regional Director, for review and comment. Within 30 days from receipt of any comment by the Regional Director, and after consideration of such comment, the board of directors shall approve the Management Policy, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank and its successors and assigns shall implement and follow the Management Policy and/or any subsequent modifications thereto.
   2. (a) Within 30 days from the effective date of this ORDER, and concurrently with compliance with the requirements of paragraph 3 of this ORDER, the Bank shall establish and thereafter continually maintain an adequate allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income, by charges against current operating income. In complying with the requirements of this paragraph 2(a) of the ORDER, the Bank's board of directors shall, at a minimum, review the adequacy of the Bank's allowance for loan and lease losses prior to the end of each calendar quarter. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of any recommended increases in the allowance, and the basis for determining the amount of allowance provided.
   (b) Reports of Condition and Income required to be filed by the Bank prior to the effective date of this ORDER and subsequent to February 4, 1991, shall reflect a provision for the allowance for loan and lease losses necessary to comply with paragraph 2(a) of this ORDER. If necessary to comply with this paragraph 2(b) of the ORDER, the Bank shall file amended Reports of Condition and Income within 30 days from the effective date of this ORDER.
   3. (a) Within 30 days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection, chargeoff or other proper entries, all assets or portions of assets classified "Loss" and one-half of all assets or portions of assets classified "Doubtful" by the FDIC as a result of its examination of the Bank as of February 4, 1991, which have not been previously collected or charged off, unless otherwise approved in writing by the Regional Director. Reduction of these assets through the use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph 3 of the ORDER.
   (b) Within 180 days from the effective date of this ORDER, the Bank shall reduce the aggregate dollar volume of all
{{5-31-93 p.A-2239}}remaining assets classified "Substandard" and "Doubtful" in the FDIC's Report of Examination of the Bank as of February 4, 1991, to not more than $22,000,000; within 360 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $18,000,000; within 540 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $14,000,000; and within 720 days from the effective date of this ORDER, the Bank shall reduce such aggregate total to not more than $10,000,000. The requirements of this paragraph 3(b) of the ORDER shall not be construed to establish a standard for future operations of the Bank.
   (c) Within 90 days from the effective date of this ORDER, the Bank shall submit to the Regional Director a written plan of action to reduce each line of credit which was adversely classified by the FDIC as of February 4, 1991, and which aggregated $500,000 or more as of that date. Such plan of action shall thereafter be implemented by the Bank and monitored, and progress reports thereon shall be submitted by the Bank to the Regional Director at 90-day intervals concurrently with the other reporting requirements set forth in paragraph 14 of this ORDER.
   (d) As used in this paragraph 3 of the ORDER, "reduce" means to (i) collect, (ii) charge off, or (iii) improve the quality of such assets sufficiently to warrant removal of any adverse classification by the FDIC.

   (b) Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has a loan or other extension of credit with the Bank that has been classified, in whole or in part, "Substandard" and is uncollected, unless a majority of the Bank's board of directors first: (i) determines that such advance is in the best interests of the Bank; (ii) determines that the Bank has satisfied the requirements set out in paragraph 3(c) of this ORDER as to such borrower; and (iii) approves such advance. A written record of the board of directors' determination and approval of any advance under this paragraph 4(b) of the ORDER shall be maintained in the credit file(s) of the affected borrower(s) as well as the minutes of the board of directors.
   (c) The requirements of this paragraph 4 of the ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit already extended to the borrower, provided such action is in accordance with both Federal and State laws, rules and regulations, and further provided all interest due at the time of such renewal or extension is collected in cash from the borrower.
5. (a) Within 30 days after December 31, 1992, and within 30 days after the end of each calendar quarter thereafter while this ORDER remains in effect, the Bank's board of directors shall calculate the Bank's Tier 1 capital as a percentage of its total assets ("capital ratio") as of the nearest preceding March 31, June 30, September 30 or December 31 date. If such capital ratio is less than 7.0 percent, the Bank shall, within 90 days from the date of such calculation, increase its Tier 1 capital by an amount sufficient to raise its capital ratio to not less than 7.0 percent as of the nearest preceding March 31, June 30, September 30 or December 31 date. Any such increase in Tier 1 capital required by this paragraph 5 of the ORDER may be accomplished by any one or more of the following:
   (i) The sale of new securities in the form of common stock or noncumulative perpetual preferred stock;
   (ii) The collection in cash of all or part of the assets other than loans classified "Loss" or "Doubtful" as of February 4, 1991, and charged off in accordance with paragraph 3 of this ORDER;
   (iii) The direct contribution of cash by the directors and/or shareholders of the Bank;
   (iv) The collection in cash of assets other than loans previously charged off; or
{{5-31-93 p.A-2240}}
   (v) Any other means acceptable to the Regional Director.

   (b) (1) If all or part of any increase in the Bank's Tier 1 capital required under paragraph 5(a) of this ORDER is accomplished by the sale of new securities, the Bank's board of directors shall take all necessary steps to adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited to the Bank's existing shareholder), the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with applicable Federal securities laws. Prior to the sale of such securities, and, in any event, not less than twenty (20) days prior to the dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, Washington, D.C. 20429 for review. Any changes in such offering materials requested by the FDIC shall be made prior to their dissemination.
   (2) In complying with the provisions of paragraph 5(b)(1) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank securities, written notice of any planned or existing development or other change which is materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph 5(b)(2) of the ORDER shall be furnished within ten (10) calendar days from the date that such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of Bank securities who received or was tendered the information contained in the Bank's original offering materials.
   (c) For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in sections 325.2(m) and 325.2(n), respectively, of the FDIC's Rules and Regulations, 12 C.F.R. §§325.2(m) and 325.2(n).
6. (a) Beginning on January 1, 1992, and as of January 1 of each year thereafter as long as this ORDER remains in effect, the Bank shall prepare realistic and comprehensive calendar year budget and earnings forecasts on a consolidated basis and shall submit them to the Regional Director for review and comment no later than January 31 of the budget year.
   (b) In preparing the budget and earnings forecasts required by this paragraph 6 of the ORDER, the Bank shall, at a minimum:
   (i) Identify the major areas in, and means by which the board of directors will seek to improve the Bank's operating performance; and
   (ii) Describe the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   (c) Progress reports comparing the Bank's actual income and expense performance with budgetary projections shall be submitted to the Regional Director concurrently with the other reporting requirements set forth in paragraph 14 of this ORDER.

10. (a) Within 60 days from the effective date of this ORDER, the Bank shall review and revise its written loan policy, and the board of directors shall approve {{6-30-93 p.A-2241}}the revised written loan policy and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. The revised loan policy and any subsequent modification thereto shall be submitted to the Regional Director for review and comment. Within 30 days from receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall adopt the revised loan policy which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank and its successors and assigns shall implement and follow the written loan policy and/or any subsequent modification thereto.
   (b) The Bank's written loan policy, as revised, shall include, but not necessarily be limited to, the following:

   (i) The establishment of an effective internal loan review and grading system, which identifies those loans warranting special attention for reasons relating to their ultimate collectability, and, at a minimum, provides for:

   (A) An identification or grouping of loans that warrant the special attention of management;
   (B) For each loan identified pursuant to subparagraph 10(b)(i)(A), a written statement of the reason(s) why the particular loan merits special attention; and
   (C) A mechanism for reporting periodically to the board of directors on the status of each loan identified pursuant to subparagraph 10(b)(i)(A), and on the action(s) taken or planned by management to improve the quality of each such loan;

   (ii) Guidelines specifying goals for loan portfolio mix and risk diversification;
   (iii) Appropriate and adequate collection procedures, including, but not limited to, the action to be taken against borrowers who fail to make timely payments;
   (iv) A requirement providing for written documentation of the borrower's ability to repay each extension of credit or renewal thereof and the establishment of a written repayment plan for each loan which takes into consideration the source of repayment and the purpose of the loan;
   (v) Specific criteria and guidelines governing extensions of credit to the Bank's executive officers, directors and principal shareholders, and their related interests, including specific disciplinary actions to be taken by the Bank against any executive officer or director who violates the criteria and guidelines and/or any officer, director or principal shareholder who benefits, directly or indirectly, from a violation of the criteria or guidelines;
   (vi) Specific policies and guidelines concerning acquisition, development and construction loans;
   (vii) Specific policies and guidelines concerning the utilization of interest financing or interest reserve funding; and
   (viii) A prohibition against (A) the addition of uncollected interest on the unpaid balance of any loan on which such interest is due, (B) the acceptance of a separate note for uncollected interest due on any loan unless supported by additional tangible collateral which adequately and completely secures the loan, (C) the continuation of accrual of interest on any loan delinquent in principal or interest payments 90 days or more, or (D) any other device that essentially avoids recognition of overdue loans and/or artificially inflates the income of the Bank.

11. (a) Within 60 days from the effective date of this ORDER, the Bank shall develop and submit to the Regional Director for review and comment: (i) a policy limiting the Bank's investment in any one asset to not more than 25 percent of the Bank's total equity capital and reserves; and (ii) a plan for reducing the Bank's present investment in any asset which exceeds such limitation. Within 30 days from receipt of any comment by the Regional Director, the board of directors shall approve both the policy and the plan, which approval shall be recorded in the minutes of the applicable board of directors' meeting. Thereafter, the Bank and its successors and assigns shall implement both the policy and the plan.
   (b) Within 90 days from the effective date of this ORDER, the Bank shall establish an acceptable system for identify- {{6-30-93 p.A-2242}}ing its total risk exposure related to acquisition, development and construction lending ("ADC loans"), including funded extensions of credit, unfunded commitments, and insubstantial foreclosures. Further, within 90 days from the effective date of this ORDER, the Bank shall devise, submit to the Regional Director for review and approval, and, upon receipt of the Regional Director's notification to proceed, implement a plan to reduce such risk exposure to a prudent and reasonable level. Such plan need not require that the Bank refuse to extend or renew credit to sound borrowers.
   (c) As used in this paragraph 11 of the ORDER, the term "ADC loan" means: (i) any loan, or portion of a loan, which is secured, directly or indirectly, by real estate, the proceeds of which loan are used to acquire and/or develop real estate to be held for resale and/or used for any commercial purpose; or (ii) any investment, in whole or in part, made by a subsidiary of the Bank relative to the acquisition and/or development, directly or indirectly, of real estate to be held for resale and/or used for any commercial purpose. As used herein, the term "develop" shall mean the construction and/or renovation of any building or other structure and shall, without limiting the generality of the foregoing, include the erection of a new building or other structure, the addition to or alteration of an existing building or structure, or the demolition of an existing building or other structure in preparation for a new building structure.