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FDIC Enforcement Decisions and Orders

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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

Introduction

   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.

Procedural Summary

   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.

Discussion

   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


1References to the record herein are as follows:
Recommended Decision . . . "R.D. at ____."
Transcript ____ "Tr. at ____."
Respondent's Exceptions ____ "Exceptions at ____."
FDIC's Exhibit ____ "FDIC Ex. ____."
Notice ____ "Notice at ____."
Joint Stipulations ____ "JS ¶____."

2Section 23A of the Federal Reserve Act is made applicable to the Bank, pursuant to section 18(j)(1) of the FDI (Continued)

{{5-31-93 p.A-2197}}Bank's deposits; and the failure of the Bank's board of directors to provide adequate supervision over and direction of the Bank to prevent the above-described unsafe or unsound banking practices and violations of law. Notice at 3–12.
   In sum, Respondent denies the allegations and asserts that any deterioration was caused by external conditions for which it cannot be held responsible and that the imposition of a cease-and-desist order would be both unnecessary and an improper penalty. Tr. at 540–554; Respondent's Brief at 32–36.3

   [.1] The data underlying this case come from two FDIC examinations, one in 1988 and one in 1991, and a 1989 State examination. Between 1988 and 1991, the Bank's CAMEL rating dropped from 2 to 4 although both Federal and state examiners had included warnings of developing and expanding problems of unsafe and unsound practices in their report of examination. FDIC Exs. 4 and 3.4Respondent's condition has declined over a short period of time. Its capital ratios are reduced; its asset structure is becoming overloaded with non-performing loans and foreclosed real estate and is highly concentrated; it engages in capitalization of interest; its credit to officers and directors is increasing and is highly adversely classified with interest capitalized; its allowances for losses is inadequate; and it has engaged in excessive transactions with affiliates. All of these practices have led to reduced earnings, increased overhead costs, poor capital ratios, low loss allowances and other signposts which lead to the conclusion that administrative action is required for the protection of Respondent and its depositors, and the integrity of the banking system. R.D. at 43. In his ninety-five page opinion, the ALJ analyzes all of the examination data relied upon to prove the unsafe and unsound practices alleged and the adverse financial condition of the Bank. The ALJ correctly concludes that the record clearly supports the FDIC's allegations. As noted, the data is not contested and the Board has adopted the findings of the ALJ. For brevity, the Board highlights the ALJ's findings regarding the condition of the Bank at the 1991 examination:

    — the total dollar volume of adversely classified loans equaled 99.4 percent of Respondent's equity capital and 14.62 percent of total loans. JS ¶21.
       — ORE in the cumulative amount of $24,963,000 equaled 12.20 percent of total assets, of which $8,839,000 was adversely classified. Adversely classified ORE equaled 35.41 percent of total ORE and 55.30 percent of total equity capital and reserves. JS ¶33.
       — Respondent's past due and nonaccrual loans equaled 16 percent of its total loans. Moreover the level of past due and nonaccrual loans increased at every examination since 1987. Tr. at 46.
       — Respondent had an excessive concentration of loans in real estate and real estate related transactions equaling $31,130,000 or 194.67 percent of its total equity capital. JS ¶36.
       — Approximately 50 percent of loans adversely classified "doubtful" and 18 per-

2 Continued:Act, 12 U.S.C. §1828(j)(1). This section provides that the total amount of a bank's "covered transactions" with its affiliates, including extensions of credit to any persons who have pledged securities of an affiliate of the bank as collateral security for such extensions of credit, may not exceed 20 percent of the bank's capital stock and surplus. Section 23A(c)(4) of the Federal Reserve Act precludes a bank from accepting securities of an affiliate as collateral security for such extension of credit, to that affiliate or any other affiliate of the bank.

3The external conditions cited by Respondent include: (1) the decline in the local economy caused by the loss of employment and decline in tourism resulting from the 1986 Space Shuttle Challenger crash; (2) the 1986 federal tax reform affecting real estate investment; (3) Florida's 1988 implementation of a Growth Management Act which imposed more stringent land use regulations on a county-by-county basis; and (4) a decline generally in the national economy.

4The Respondent challenges the fact that following the 1991 examination, FDIC examiner-in-charge ("EIC") John S. Wholeben recommended a composite CAMEL rating of 3, although a rating of 4 was ultimately issued. Upon review, Wholeben's superior, Assistant Regional Director James A. Shumaker, recommended to superiors at FDIC headquarters the assignment of a composite rating of 4. Shumaker's recommendation was followed. A composite rating of 4 is typically enforced by issuance of a cease-and-desist order. Respondent's challenge is wholly without merit. An EIC does not have the authority to assign a final composite rating. Where there is disagreement between the recommendation of the EIC and the review judgment of the Assistant Regional Director, the final rating assignment is made at headquarters in Washington, D.C. Tr. at 270; see also Division of Supervision General Memorandum No. 6, January 24, 1985. As correctly found by the ALJ, "the FDIC did not err in not following Wholeben's advice." R.D. at 10. The authority to issue a cease-and-desist order in a contested proceeding has been delegated by the FDIC Board to the Regional Directors of the Division of Supervision. 12 C.F.R. §303.9(b)(1).
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    cent of loans adversely classified "substandard" equaled $2,874,880 or 246.77 percent of Respondent's allowance for loan and lease losses. Tr. at 52–54. It had been the Bank's experience that 18 percent of its gross loans adversely classified "Substandard" resulted in loss. Id.
       — Earnings had declined dramatically due to a decline in income from $2,443,000 to $1,057,000, or from 1.32 percent of average assets to 0.52 percent between 1989 and 1990. JS ¶32.
       — Loans to directors and officers and their related interests, as of February 4, 1991, equaled $4,148,000 of which 26 percent was adversely classified. FDIC Ex. 2.
       — Although management had made some attempts to implement previous recommendations, management efforts were clearly inadequate. Tr. at 69–70.
The poor condition of the Bank is clear from the record.
   In discussing Respondent's affirmative defenses, the ALJ makes several appropriate conclusions. First, he concludes that Respondent's "assertions that its policies and practices and management were not the proximate cause of the decline in the Bank's financial condition do not withstand scrutiny." R.D. at 31. Rather, he finds that there is a clear "causal connection between the Respondent's conduct and practices and the poor state of [its] financial condition." Id. He finds that there is "no material or relevant evidence in the record" that the external conditions cited by Respondent were "determinative, or predominated over Respondent's unsafe or unsound practices and violations of law." R.D. at 32. Finally, the ALJ rejects Respondent's economic argument and credits the testimony of FDIC Senior Financial Analyst Jack M.W. Phelps, who conducted a comparative financial analysis of the Bank.5The comparative analysis revealed that there were a number of financial institutions, with similar financial and asset characteristics, operating in the same economic environment as the Respondent, most of which did not experience Respondent's financial and operational weaknesses. R.D. at 33; FDIC Ex. 30; Tr. at 601–615.

   [.2] Respondent claims that the Bank's directors have "voluntarily adopted, implemented and are actively pursuing a comprehensive compliance plan to remedy problems" and thus the issuance of a cease-and-desist order would be excessive and unwarranted. Answer/Affirmative Defenses ¶4. With understatement the ALJ describes Respondent's proposal as an attempt at "one more escape from administrative regulation by a plan of future self remediation." R.D. at 36. He correctly concludes that this would be "no solution to the situation." Id. The ALJ discusses the relevant case law and correctly concludes 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." He notes that "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 practices and violations of applicable laws and regulations." R.D. at 41. The objective of a proceeding such as this one is not to punish an institution, but rather to return it to sound financial condition. Therefore, where, as here, the Bank's management has a history of half-hearted, and thus ineffective and inadequate improvement efforts, the Board's discretion to issue a formal cease-and-desist order is appropriately exercised.

Exceptions

   Generally, Respondent's Exceptions simply reiterate arguments previously made in its brief and reply brief. One item, however, merits attention.
   Respondent asserts that the ALJ erred in finding that Merritt Capital Corporation, Cocoa, Florida ("Merritt Capital Corp."), is an affiliate of the Bank, and that, therefore, he incorrectly found a violation of section 23A of the Federal Reserve Act, 12 U.S.C. §371c.6Exceptions at 2. Respondent attributes the ALJ's conclusions to a "misapplications of the law of evidentiary admissions." Id.7


5This was done by creating a "peer group" profile of a number of banks, including Respondent, which had similar financial and asset characteristics.

6There is no dispute that The American Bancorporation of the South, Merritt Island, Florida; Sisoro Inc., Merritt Island, Florida; C&R Joint Ventures, Inc., Cocoa, Florida; and Southern Capital Corporation, Merritt Island, Florida, are affiliates of the Bank.

7As discussed below, the Respondent has misstated the evidence presented to the ALJ and, thus, the issue (Continued)

{{5-31-93 p.A-2199}}The ALJ correctly found, however, that this question of whether Merritt Capital Corp. is an affiliate is irrelevant to the determination that violations occurred. Covered transactions with affiliates may be conducted only to the extent that they do not exceed 20 percent of Respondent's capital stock and surplus. The total of Respondent's covered transactions exceeded the 20 percent limitation excluding the transactions related to Merritt Capital Corp. R.D. at 26.8

Conclusion

   Based on the foregoing and the further findings of the ALJ which are incorporated herein, the Board will issue an Order to Cease-and-Desist to enjoin the Bank from engaging in unsafe or unsound banking practices and violations of applicable law and to require the Bank to take affirmative action to correct the adverse consequences of the specified practices and violations.

ORDER TO CEASE AND DESIST

   The Board of the FDIC, having considered the record and the applicable law, finds and concludes that The American Bank of the South, Merritt Island, Florida, 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 FDI 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 FDI 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 losses 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 persons 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

7 Continued:before the Board. This is not a case where the ALJ was called on to weigh a prior admission against a current denial. The finding of the ALJ and the Board is based upon the uncontroverted evidence presented by FDIC Enforcement Counsel and thus has nothing to do with the "law of evidentiary admissions."

8There is no dispute regarding the amounts involved in the transactions. Moreover, even if this issue were relevant, Respondent failed to submit any evidence to rebut the officer's questionnaire signed by Bank President Morris A. Rowe which identifies Merritt Capital Corp. as an affiliate.
{{5-31-93 p.A-2200}}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 (Supervision) 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 FDI 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 calender 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, charge-off 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 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 {{5-31-93 p.A-2201}}$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. 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.
   4. (a) 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 charged off or classified, in whole or in part, "Loss" or "Doubtful" and is uncollected.
   (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 interest 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, 1993, and within 30 days after the end of each calender quarter thereafter while this ORDER remains in effect, the Bank's board of directors shall calculate the Bank's Part 325 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 Part 325 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 Part 325 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
       (v) Any other means acceptable to the Regional Director.

   (b) (1) If all or part of any increase in the Bank's Part 325 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 con- {{5-31-93 p.A-2202}}trolled 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 shareholders), the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with 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, 1993, 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.
   7. As of the effective date of this ORDER, the Bank shall not pay any cash or property dividends without the prior written consent of the Regional Director.
   8. Within 30 days from the effective date of this ORDER, the Bank shall take all necessary steps, consistent with sound banking practices, to eliminate and/or correct all violations of laws committed by the Bank, as described on page 6-a of the FDIC's Report of Examination of the Bank as of February 4, 1991. In addition, the Bank shall adopt appropriate procedures to ensure its future compliance will all applicable laws and regulations.
   9. Within 30 days from the effective date of this ORDER, the Bank shall correct the internal routine and control deficiencies as described on page 6-b of the FDIC's Report of Examination of the Bank as of February 4, 1991.
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 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 {{5-31-93 p.A-2203}}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) each loan identification 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 identification 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 or 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 extension 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 lending ("ADC 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 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 identifying its total risk exposure related to ADC loans, including funded extensions of credit, unfunded commitments, and insubstance foreclosures. Further, within 90 days from the effective date of this ORDER, the Bank shall devise, submit to the Regional Director's notification to proceed, implement a plan to reduce such {{5-31-93 p.A-2204}}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, or 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.
   12. Within 90 days from the effective date of this ORDER, the Bank shall submit to the Regional Director a written marketing plan for each parcel of real estate owned, directly or indirectly, by the Bank and/or any subsidiary of the Bank, other than real estate used as Bank premises, having a fair market value equal to or exceeding $500,000. Any real estate which will be held by the Bank and/or any subsidiary of the Bank for investment shall be supported by an independent appraisal which has been performed within the last 12 months and which will be updated no less frequently than every 18 months as long as this ORDER remains in effect.
   13. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER (1) in conjunction with the Bank's next shareholder communication and also (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe this 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.
   14. Within 90 days from the effective date of this ORDER, and every 90 days 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. All progress reports and other written responses to this ORDER shall be reviewed by the Bank's board of directors and made a part of the minutes of the appropriate board of directors' meeting.
   15. The provisions of this ORDER shall become effective ten (10) days from the date of its issuance and shall be binding upon the Bank, its institution-affiliated parties, and its successors and assigns. Further, the provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 30th day of March, 1993.

/s/ Hoyle L. Robinson
Executive Secretary

_________________________________________
RECOMMENDED DECISION

In the Matter of
THE AMERICAN BANK OF THE
SOUTH
MERRITT ISLAND, FLORIDA
(Insured State Nonmember Bank)
Docket No.
FDIC-92-17b

{{5-31-93 p.A-2205}}

TABLE OF CONTENTS

I. STATEMENT OF THE CASE
A. Synopsis of the Issues 3
B. Procedural History 4
C. Transcript Corrections 5
II. DISCUSSION
A. Background 5
B. FDIC Examination of
February 4, 1991 8
C. Statutory Basis for Cease and
Desist 12
D. Definition of Unsafe and
Unsound Practices 13
1. Legislative History 13
2. Judicial Recognition 15
E. Specific Practices
1. Excessive Adversely
Classified Loans and Other
Real Estate 18
2. Hazardous Lending and
Lax Collection 20
3. Concentration of Credit 22
4. Inadequate Allowance for
Loan and Lease Losses 22
5. Unsatisfactory Earnings 24
6. Insider Trading 25
7. Unsatisfactory Bank
Management 25
F. Examiners' Conclusions 26
1. Deference Due 26
2. Conclusions Reached 29
G. Proximate Cause of
Deterioration 31
H. Excessive Transactions with
Affiliates 33
I. Discontinuance or Correction
of Practices 36
J. Final Summary 43
III. FINDINGS OF FACT
A. General Findings 44
B. Capital and Asset Structure 46
C. Decline in Level of Adjusted
Capital and Reserves 48
D. Poor Quality Assets and
Contingent Liabilities 48
E. Nonaccrual Loans 53
F. Increase in Overhead
Expenses 54
G. Inadequate Allowance for
Loan and Lease Losses 54
H. Decline in Earnings 58
I. Increase in Levels of ORE
and of Adversely Classified
ORE 59
J. Excessive Investment
Concentration 62
K. Capitalization of Interest 63
L. Hazardous Lending and Lax
Collection Practices 64
M. Conditions Resulting from
Hazardous Lending and Lax
Collection Practices 72
N. Extension of Credit to
Affiliates and to Individuals
Pledging Securities of
Affiliates 73
O. Increase in Level of
Extensions of Credit to
Officers and Directors 75
P. Unsatisfactory Management 76
Q. Uniform Composite Rating 79
R. Peer Comparison 81
S. Economic Conditions 81
R. Additional Factors 84
IV. CONCLUSIONS OF LAW 85
V. RECOMMENDED ORDER 95
VI. PROPOSED FINAL ORDER 96
VII. CERTIFICATION OF
SERVICE 114

Walter J. Alprin, Administrative Law Judge:

I. STATEMENT OF THE CASE

A. Synopsis of Issues

   There are virtually no fact or credibility issues in this proceeding. As evidenced by a series of federal and state bank examinations, Respondent's condition has deteriorated over a short period of time. FDIC argues that this was the result of a continuation of unsafe and unsound banking practices as to which Respondent had previously been warned, and that certainty of elimination of such practices can only be obtained through the imposition of a formal cease and desist order. FDIC also argues that Respondent violated that portion of the statute restricting certain transactions with affiliates.
   Respondent argues that any deterioration was caused by exogenous conditions impacting on sound banking practices, and that imposition of a cease and desist order would be both unnecessary, and an improper affliction of a penalty. It denies that Respondent proved an improper transaction with affiliates. A sub-issue is the Examiner-in-Charge's recommendation upon submitting his report that a less severe restriction, an {{5-31-93 p.A-2206}}informal Memorandum of Understanding rather than a Cease and Desist Order, should be imposed, which upon review was not followed by the FDIC Regional Office or the FDIC Board of Directors. The Examiner-in-Charge testified at the hearing that upon reconsideration of the factors underlying his report he agreed with the change in ultimate recommendation and action proposed.

B. Procedural History

   On January 16, 1992, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Charges ("Notice") against the American Bank of the South ("Bank" or "Respondent"), of Merritt Island, Florida, alleging that Respondent engaged in specified unsafe or unsound banking practices resulting in operational and managerial weaknesses requiring corrective measures, and violated specified portions of the applicable statutes. The relief requested by FDIC is an Order pursuant to 12 U.S.C. §1818(b)(1), requiring Respondent to cease and desist from the unsafe or unsound banking practices and the violations, and take affirmative action.
   Respondent timely answered the Notice, and following intermediate motions and discovery proceedings, a hearing was held before the undersigned in Orlando, Florida on July 21, 22, and 23, 1992, after which counsel filed appropriate briefs and replies.

C. Transcript Corrections

   Unopposed motions by each of the parties for correction of the Transcript of Hearing are herewith granted.

II. DISCUSSION1

A. Background

   Respondent began operations in 1970, servicing the community of Brevard County in Merritt Island, Florida. (FDIC Ex. 2/44),2and from its inception has primarily operated in real estate purchase and development lending. (Tr. 298–300, 357). Respondent has grown in size over the years to an institution with an asset base of over $205,000,000 and with a capital base of roughly 15 million. (FDIC Ex. 2/27; Tr. 298–300).
   In 1980, the one-bank holding company, The American Bancorporation of Merritt Island, ("Bancorporation") was formed (FDIC Ex. 2 at 44), and owns all of Respondent's shares. Respondent owns and controls five non-banking subsidiaries: The American Mortgage Corporation of the South, Plumosa Properties, Inc., ABC Ventures, Inc., Lost Lakes Development, Inc., and TAB Investments, Inc. (FDIC Ex. 2/2; FDIC Ex. 4/17).
   Respondent contends that, so far as the alleged unsafe and unsound banking practices, any problems faced by Respondent are a result of external forces such as the local economy, and not a result of the Respondent's internal practices. As a real estate-oriented bank, Respondent was subject to being impacted by the declining local economy of Brevard County influenced by the Space Shuttle Challenger crash in 1986 which resulted in the temporary closing of the space program and loss of employment and tourism, the 1986 federal tax reform affecting real estate investment, Florida's 1988 implementation of a Growth Management Act which imposed more stringent land use regulations on a county-by-county basis, and a decline generally in the national economy. (Tr. 540-42, FDIC Ex. 4/41). Bank examiners warned Respondent to diversify its portfolio, to make loans based more on willingness and ability to repay than on collateral, and to allocate risks rather than relying so heavily on real estate acquisition and development. Although attempts at diversification were made, none were successful and some were costly. (Tr. 305).
   After FDIC examination in 1987, recommending that Respondent enter into a memorandum of understanding ("MOU"),3Respondent rejected the recommendation, but adopted a substantially similar restrictive lending program in November 1988. (Tr. 441-441). The restrictive loan policy limited the amount of loans made to borrowers and real estate projects, lowering loan to


1Though Findings of Fact, with record references, appears as Part III hereof, a large number of factual record references are included in this section as well.

2Citations to the record herein will be stated as follows:    "TR" refers to pages of transcript of hearing.
   "JS" refers to numbered findings of the Joint Stipulation.
   "FDIC Ex." refers to FDIC's exhibit number/page number.

3A MOU is similar to a formal Cease and Desist order but the parties involved are not subject to civil money penalties for noncompliance.
{{5-31-93 p.A-2207}}value ratios, and evaluating a borrower's financial capacity. (FDIC Ex. 2/3).
   In later 1988, the FDIC examined Respondent, and although the examiner gave Respondent a uniform composite ("CAMEL") rating of 2,4 he expressed concerns about Respondent's future, stating:
    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).
   An examiner for the State of Florida, Department of Banking and Finance, prepared a report of examination dated December 31, 1989, indicated that Respondent was in satisfactory condition, again receiving a composite rating of 2. However, the report noted deteriorating conditions and warned against an overemphasis of real estate asset-based lending, as follows:
    ...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).
Thus, the 1988 Federal and the 1989 State examinations point to developing and expanding problems and of unsafe and unsound practices already in effect.
B. FDIC Examination of February 4, 1991
   The FDIC conducted an examination of Respondent as of close of business on February 4, 1991, assigning a uniform composite rating of 4 signifying an immoderate volume of serious financial weaknesses. (Tr. 72). The primary weakness was the excessively high level of assets that were of substandard quality or worse. (Tr. 34, 72). The table below appears on the first page of that report and shows Respondent's deterioration compared to the two prior examinations:

FDIC EXAM STATE EXAM FDIC EXAM
2-4-92 12-31-89 12-31-88
A. Items subject to adverse classification 25,596 16,094 12,728
B. Classified assets/total assets 12% 8% 9%
C. Classifications as a % of capital5 160% 96% 83%
D. Classified loans/total loans 15% 13% 9%
E. Overdue loans/gross loans6 16% 9% 8%


4 CAMEL rating is a composite of the institution's capital, assets, management, earnings, and liquidity. 1 is the best on the CAMEL rating and 5 is the worst.

5 Row C, column 1, signifies 160 percent of capital that is comprised of loans which have a distinct potential for loss and contain other weaknesses. (Tr. 41.)

6 Row E. signifies the level of delinquent loans which is an indicator of problems present in the loan portfolio. (Tr. 46).
{{5-31-93 p.A-2208}}    After a four or five week on-site investigation with a team of 13, Examiner-In-Charge John S. Wholeben initially recommended a CAMEL rating of 3, and the informal corrective measure of a memorandum of understanding. (Tr. 126–127, 238). At the March 26, 1991, interview-exit meeting with the Board of Directors, Wholeben explained that his recommendation was only preliminary, and subject to the final review of the regional office, by Regional Director James Schumaker. (Tr. 129, 131–132, 145.) Wholeben considered that mitigating circumstances existed in this instance sufficient to support a recommendation of a memorandum of understanding rather than the more formal and enforceable corrective measure of a cease and desist order. (Tr. 148).
   FDIC Regional Director Schumaker and other superiors did not agree with Wholeben. Respondent ultimately received a composite rating of 4, which typically is enforced by an issuance of a cease and desist order.7 Although Wholeben's initial recommendation was a CAMEL rating of 3 and an informal agreement rather than a formal agreement, the FDIC did not err in not following Wholeben's advise and instead issued a cease and desist order to correct Respondent's problems.8
   At the hearing more than one year after the fact, Wholeben recognized that Respondent's problems had not improved and in fact, Respondent's condition continued to deteriorate. Wholeben testified that a cease and desist order is a prudent course of action for this institution.
   Regional Director Schumaker testified that the examination evaluation findings were more consistent with a CAMEL rating of 4 than of 3. As is required,9 he made his report to his supervisors at FDIC headquarters office, recommending the lower rating and more stringent action, in part, on the basis of Respondent's earnings being under strain and management's policies and practices being detrimental to the prospect of recovery of the institution. Schumaker did not revisit Respondent, nor did anyone else when making the determination that a revised rating was necessary. Schumaker's recommendation was based on the notes, report, and general findings of the on-cite examiners. Schumaker's recommendation was adopted by the FDIC Board of Directors.
   At hearing, examiner Wholeben testified that he reexamined his prior recommendation, and endorsed the agency's position. In view of the internal inconsistency in the two recommended ratings the undersigned has been particularly careful to consider whether the FDIC has sufficiently supported its charges, and comes to the conclusion that it has.

C. Statutory Basis for Cease and
Desist Orders

   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

7 Aside from the CAMEL rating system, there is also the C-A-E-L rating system which is CAMEL without the "M" or without the analysis of management. CAEL, unlike CAMEL, is an electronic process or numerical system of analyzing an institution's soundness. (FDIC Ex. 2/28, Tr. 452). The Bank received a 3.59 composite rating from the CAEL findings. (Tr. 478). As a reminder, CAMEL stands for capital, assets, management, earnings, and liquidity. The chart below is a comparison of the CAMEL ratings found by examiner Wholeben and Regional Director Schumaker, and the computer generated CAEL rating:
C A M E L
Examiner Wholeben 3 4 3 4 2/3
Regional Director 3 4 4 4 2/4
C-A-E-L RATING 4 4 NA 3 2

8 See, Bank of Dixie v. Fed. Dep. Inc. Corp., 766 F.2d 175 (1985).

9 The regional office does not have the authority to assign a composite rating to an institution. (Tr. 270). Whether a cease and desist order should issue in a contested proceeding rests with the board of directors of FDIC. See Federal Deposit Insurance Act, §§2(2), 2(8), 12 U.S.C.A. §§1812, 1818. See also, Bank of Dixie v. Fed. Dep. Ins. Corp., 766 F.2d 175 (1985).
    {{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.
   This proceeding is based upon allegations of past and present unsafe and unsound banking practices, and violations of statute, each of which will be examined.

D. Definition of Unsafe and
Unsound Practices

1. Legislative History of Concept

   The acts or practices which are deemed to be unsafe or unsound within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), are not specified or otherwise identified in the statute; likewise, the phrase "unsafe or unsound practice" is not defined. The phrase has, however, been used in legislation applicable to the FDIC for over fifty years. The precursor of the present section 8(a) of the Act, 12 U.S.C. §1818(a), relating to the termination of insurance of an insured bank, referred to unsafe or unsound practices when enacted as part of the Banking Act of 1935 (C,")d. 614, §101(I), 49 Stat. 684, 690).10 Furthermore, the legislative history of the Financial Institutions Supervisory Act of 1966 shows that Congress carefully considered the phrase "unsafe or unsound" and, by retaining that phrase in the final legislation, concluded that the phrase was sufficiently clear and definite to be understood by those subject to its proscription.
   This conclusion is demonstrated by the fact that both houses of Congress quoted with approval from a memorandum introduced by the then Chairman of the Federal Home Loan Bank Board, John E. Horne, that clarified what constituted "unsafe or unsound" banking practices. See, 112 Cong. Rec. 25008 (bound ed. Oct. 4, 1966) (House); 112 Cong. Rec. 26474 (daily ed. Oct. 13, 1966) (Senate).
   The concept of "unsafe or unsound" banking practices was described by Chairman Horne in that memorandum as follows:
    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-

10 The phrase "unsafe or unsound practices" is somewhat similar to the language found in the Federal Trade Commission Act which provides that unfair methods of competition and "unfair or deceptive acts or practices" are unlawful. 15 U.S.C. §45(a) (1). It is firmly established that Congress, in enacting the Federal Trade Commission Act, intentionally refrained from attempting to define the quoted phrase or to enumerate the practices that were within its scope (S. Rep. No. 597, 63d Cong., 2d Sess. (1914); H.R. Rep. No. 1142, 63d Cong., 2d Sess. 18-19 (1914)). Congress advisedly adopted a phrase which does not admit to precise definition, but the meaning and application of which must be arrived at by the gradual process of inclusion and exclusion. Federal Trade Commission v. Keppel & Bro., 291 U.S. 304, 312 (1934). Consider also the phrase "the public convenience and necessity," in the Interstate Commerce Act. Congress undoubtedly adopted a similar regulatory scheme in section 8 of the Act.
    {{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).

2. Judicial Recognition

   The courts have given judicial recognition to the concept of unsafe or unsound banking practices which are contrary to generally accepted standards of prudent operation and which might result in abnormal risk or loss to a bank. In First National Bank of Eden v. Department of the Treasury, 568 F.2d 610 (8th Cir. 1978), the Eighth Circuit Court of Appeals expressed its approval of a definition given to the phrase "unsafe or unsound" by the Comptroller of the Currency, stating: "Congress did not define unsafe and unsound banking practices... However, the Comptroller suggests that these terms encompass what may be generally viewed as conduct deemed contrary to accept standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder." Id. at 611 n.2. (emphasis added).
   The court also expressed general deference to the expertise of the Comptroller of the Currency in defining what constitutes an unsafe or unsound practice, stating that the courts could only overturn an agency determination based on the showing of arbitrary and capricious judgment; if substantial evidence supported the agency, its determination would stand. See also, In re Franklin National Bank Securities Litigation, 478 F. Supp. 210 (D.C.N.Y. 1979). In First National Bank of LaMarque v. Smith, 610 F.2d 1258 (5th Cir. 1980), the Fifth Circuit Court of Appeals adopted the Comptroller definition of "unsafe or unsound" practices affirmed by the Eighth Circuit Court of Appeals in Eden, supra.
   Courts have generally deferred to the expertise of the bank regulatory agencies in defining what constitutes an "unsafe or unsound practice," limiting judicial review to a determination of whether the action taken by the regulatory agency was arbitrary or capricious or otherwise unsupported by substantial evidence. In this regard, the Fifth Circuit Court of Appeals 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 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).
   The District of Columbia Court of Appeals in Independent Bankers Association of America v. Heimann, 613 F.2d 1164 (D.C. Cir. 1979), reh'g denied (1980), considered whether the Comptroller could statutorily define a particular "unsound or unsafe" practice. Plaintiff there challenged a regulation preventing national bank insiders from receiving commissions for credit life insurance sold to a bank's borrowers. In upholding the regulation, the court stated that the agency's discretionary authority to define and eliminate "unsafe or unsound" practices is to be "liberally construed." Id. at 1169. Most recently the Fifth Circuit Court of Appeals reiterated the need for progressive application when it concluded that:
    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.
MCorp Financial, Inc. v. Board of Governors of the Federal Reserve System, 900 F.2d 852 (5th Cir. 1990).
   Other courts have reached similar conclusions in their analysis and application of section 8(b) of the Act, 12 U.S.C. §1818(b). See, First State Bank of Wayne County v. Federal Deposit Insurance Corporation, 770 F.2d 81 (6th Cir. 1985); Bank of Dixie v. Federal Deposit Insurance Corporation, 766 F.2d 175 (5th Cur. 1985); Northwest Nat'l Bank v. Department of the Treasury, 917 F.2d 1111 (8th Cir. 1990); and First Nat'l Bank of Gordon v. Dept. of Treasury, 911 F.2d 57 (8th Cir. 1990).

E. Specific Practices Identified

1. Excessive Adversely Classified Loans
and ORE

   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


11 The FDIC examiners' written analyses of the Bank's adversely classified loans appear to pages 50–64 of FDIC Ex. 2.
{{5-31-93 p.A-2212}}was adversely classified ORE equaled 35.41 percent of total ORE and 55.30 percent of total equity capital and reserves. (JS ¶33, 34; Tr. 60).
   Respondent maintained a poor quality of asset structure, primarily in $24,727,000 of loans and ORE, which equaled 12.09 percent of Respondent's total assets and 160.07 percent of Respondent's total equity capital and reserves which were adversely classified. (JS ¶20; FDIC Ex. 2/7, 9; 7).


2. Hazardous Lending and Lax
Collection Practices

   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.

CRITICIZED ASSETS AMOUNT (a) (b) (c) (d) (e) (f) (1) (2)
AMERICAN PIONEER
PARTNERS, INC. $1,308,000.00 X X
FOLEY, JOSEPH D. &
JOAN D. 572,000.00 X X X
GIOIA, G. LEONARD,
M.D. 623,000.00 X X X X
GRIFFIN, G.R. &
RELATED INTERESTS 3,090,000.00 X X X X
GRIFFIS, EDGAR E. &
RELATED INTERESTS 1,663,000.00 X X
SMITH, RUTH K. &
RELATED INTERESTS 1,112,000.00 X X X X X
STEELE, VAL M. &
RELATED INTERESTS 2,765,000.00 X X X X
TOMPKINS LAND &
HOUSING, INC. 2,250,000.00 X X X X X
BARNAS, ROBERT P. &
BARBARA 369,000.00 X X
D & S REAL ESTATE
398,000.00 X X
SUMMERS, CHARLES L.
& PAULA M. 480,000.00 X X X
WIECZORECK, LOUIS
T. & EDITH L.
327,000.00 X X
MERRITT CAPITAL
CORPORATION 104,000.00 X
SOUTHERN CAPITAL
CORPORATION 1,074,000.00 X X
KAY, SEBRON E. 90,000.00 X
{{5-31-93 p.A-2213}}
CRITICIZED ASSETS AMOUNT (a) (b) (c) (d) (e) (f) (1) (2)
LIBERMAN, ARNOLD -
MODERN DEVELOP-
MENT 256,000.00 X
ROWE, MORRIS A. 150,000.00 X
SISORO, INC. 72,000.00 X
C & R JOINT
VENTURES, INC. 1,277,000.00 X X
KETCHAM, RODNEY S. 60,000.00 X
TOTAL $18,040,000.00
   The examination also revealed that the Respondent had an excessive volume of overdue and nonaccrual loans, including 45 loans in the cumulative amount of $6,087,000 which were more than 30 days past due and 46 loans in the cumulative amount of $8,420,000 which were in a nonaccrual status. (JS ¶24; FDIC Ex. 2/75; Tr. 44–47). The level of Respondent's past due and nonaccrual loans equaled 16 percent of its total loans. (Tr. 46).12 Moreover, the level of Respondent's past due and nonaccrual loans had increased at every examination of Respondent since 1987, (Tr. 46) a reliable indicator of problems in the loan portfolio. (Tr. 46).

3. Concentration of Credit

   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).

4. Inadequate Allowance For Loan and
Lease Losses

   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).

5. Unsatisfactory Earnings

   The level of Respondent's earnings had dramatically declined during the years 1989 and 1990 (Tr. 60–64; FDIC Ex. 2/12, 78) due to a decline in Respondent's income, which decreased, after payment of taxes, 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 Respondent's Average Assets as of December 31, 1990. (JS ¶32; 38; FDIC Ex. 2/4, 12, 78). This decline resulted from a number of factors, including, hazardous lending and lax collection practices (FDIC Ex. 2/4); increased and excessively high overhead expenses, which were as of December 31, 1989, 5.0 percent of Average Assets (JS ¶30; FDIC Ex. 2/4, 12); and an increase in loan losses. (Tr. 63). The examiners concluded that there would be further reductions in Respondent's earnings in the future due primarily to the requirement of funding the inadequacy of the
12 In addition, the Bank was accruing interest on 13 loans in the aggregate amount of $214,000 which were overdue 90 days or more. (JS ¶25).

13 It had been the Bank's experience that 18 percent of its gross loans adversely classified "Substandard" resulted in loss. (Tr. 55–56; FDIC Ex. 2/74).
{{5-31-93 p.A-2214}}allowance for loan and lease losses and future losses from the high level of adversely classified assets. (Tr. 62–65; FDIC Ex. 2/4-5).

6. Insider Transactions

   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).

7. Unsatisfactory Bank Management

   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).

F. Examiner's Conclusions

   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-
{{5-31-93 p.A-2215}}
    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.
Id. at 1582-83.
   Obviously, examiners' conclusions are not 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 review. However, the appropriate degree of scrutiny will vary depending upon whether the reviewer is concerned with strict factual findings or discretionary decisions requiring the exercise of informed judgment, and the examiners' discretionary decisions are granted great deference.
   After ascertaining the relevant facts, the examiner 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 Administrative Law Judge is required to defer to the expertise of the examiners and of the expert reviewers, in weighing the classification conclusions. The courts will generally not substitute their own subjective judgment for that of the examiner, and may only set the classification aside if it is without objective factual basis or is shown to be arbitrary and capricious. Sunshine, at 1583.
   Under the standard set forth above, and predicated on the training, experience and expertise of the FDIC's expert witnesses, the findings, opinions and conclusions of these individuals are entitled to great weight and considerable deference in determining whether Respondent has engaged in unsafe or unsound practices and violations of Federal banking laws and whether Respondent is in an unsafe or unsound condition. Moreover, the opinions and conclusions of these expert witnesses as to whether an Order to Cease and Desist is required is also entitled to great weight.
   The extent to which great weight and deference should be accorded to the opinions and conclusions of the FDIC's expert bank examiners was addressed by the FDIC's Board of Directors in In the Matter of Anderson County Bank, Clinton, Tennessee, FDIC-89-235a, 2 P-H FDIC Enf. Dec. ¶5165A (1991), concluding that considerable deference and weight should be given to the opinions and conclusions of FDIC examiners in matters relating to the safety and soundness of financial institutions. The Board concluded that:
    [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

2. Conclusions Reached

   Much of the documentary evidence and testimony concerning the financial condition of Respondent in this proceeding was prepared and presented by two of the FDIC's expert witnesses, Examiner-in-Charge Wholeben (Tr. 14–104, 125–193, 643–656) and Senior Financial Analyst Jack M. W. Phelps (Tr. 588–643). Wholeben concluded, after his comprehensive examination of Respondent, that, in his expert opinion, Respondent:
   (a) Had been operated by management whose policies and practices are, and were, detrimental to Respondent (Tr. 70, 73–74, 25–87, 212);
   (b) Had serious financial weaknesses which, if not corrected, could impair Respondent's future viability (Tr. 71–73; FDIC Ex. 1/20);
   (c) Had engaged in unsafe or unsound banking practices (Tr. 74–79);
   (d) Had engaged in hazardous lending and lax collection practices which produced an
14 In another recent decision the Board reached the same conclusion regarding deference to be accorded to the opinions and conclusions of FDIC examiners. See, In the Matter of Mansfield Bank, Mansfield, Louisiana, FDIC -90-44b, 2 P-H FDIC Enf. Dec. 5165 (1991).
{{5-31-93 p.A-2216}}excessive volume of substandard loans (Tr. 79–82);
   (e) Had failed to maintain an adequate allowance for loan and lease losses (Tr. 82–83); and
   (f) Had been operated by a board of directors which failed to provide adequate supervision over and direction of Respondent. (Tr. 83–85).
   As a consequence of the foregoing, in the exercise of expert judgment and after considering the bases of the amendment upon internal review, Wholeben concluded that Respondent had engaged in unsafe or unsound banking practices and violations of law and was in an unsafe or unsound condition as a result of such practices and violations. Wholeben further concluded and that an affirmative Cease and Desist Order should issue to provide Respondent with a formal program to correct the unsafe or unsound practices and violations of law and to return Respondent to a safe and sound condition. (Tr. 14–104).
   These expert opinions and conclusions were also held by Assistant Regional Director James A. Shumaker of the FDIC's Atlanta Regional Office, Division of Supervision. (Tr. 195–283). Shumaker concluded after his review and analysis of the facts presented in the Report of Examination of Respondent as of February 4, 1991 (FDIC Ex. 2), that contrary to Wholeben's original conclusions that Respondent had engaged in unsafe or unsound banking practices and violations of law which warranted a CAMEL rating of 3, the violations in which Respondent had engaged and continued to practice warranted a CAMEL rating of 4 and that an Order to Cease and Desist was required to address Respondent's problems. (Tr. 214–223).15
   Phelps, a Senior Financial Analyst and an expert witness, testified that he had conducted a financial analysis of Respondent covering the period October 1990 through early July, 1992, (Tr. 591), upon which he prepared a comparative analysis of Respondent in relationship to a "peer group" of banks. (Tr. 592–596, 598). The results of the comparative financial analysis demonstrated to him that "the [Respondent] exhibits extreme weaknesses and appears to be in a distressed condition." (Tr. 598).
G. Proximate Cause of Deterioration

   Respondent's assertions that its policies and practices and its management were not the proximate cause of the decline in Respondent's financial condition do not withstand scrutiny. The undisputed evidence in the record of this proceeding establishes a clear inference of a causal connection between the Respondent's conduct and practices and the poor state of Respondent's financial condition. This is all that is required to establish that Respondent, acting through its officers and directors, had engaged in unsafe or unsound banking practices. See, Northwest Nat'l Bank v. Department of the Treasury, 917 F.2d 1111, 1115 (8th Cir. 1990).16
   Further, Respondent's affirmative defense that adverse exogenous economic forces and conditions were the cause of its deteriorating financial condition is not supported by the clear weight of the evidence. Respondent argues that since it was subjected to adverse economic conditions beyond its control, no sanction should be imposed by the FDIC in the form of an Order to Cease and Desist. It is undisputed that local economic conditions has some marginal effect on Respondent's financial condition, and virtually all of the testimony and exhibits offered by Respondent thereon were admitted into the record. However, there is no material or relevant evidence in the record that such conditions were determinative, or predominated over Respondent's unsafe or unsound practices and violations of law discussed at length herein. It was not adverse economic factors which occasioned Respondent's financial problems, but rather the unsafe or unsound practices and violations of law in which it engaged. The fallacy of Respondent's economic argument becomes clear
15 At the evidentiary hearing, the FDIC also called as a witness Linda R. Townsend, Chief of the Bureau of Financial Institutions, District II, Florida Department of Banking and Finance. Ms. Townsend testified that she had analyzed the condition of the Bank and was of the view that the Bank was in an unsafe and unsound condition. (Tr. 108–112). Ms. Townsend further testified that an Order to Cease and Desist was appropriate under the circumstances. (Tr. 112–116).

16 Even assuming, arguendo, that proximate causation is a colorable affirmative defense, the Bank has failed to present any credible evidence in support of such a defense. The party that raises an affirmative defense has the burden of going forward with the evidence. See generally, Ohio-Sealy Mattress Mfs. Co. v. Kaplan, 712 F.2d 270 (7th Cir. 1983). The Bank has failed to meet its burden of generating facts to support this affirmative defense and, as such, the defense should be deemed abandoned.
{{5-31-93 p.A-2217}}by considering the testimony of FDIC Senior Financial Analyst Phelps (Tr. 587–643), who conducted a comparative financial analysis of the Bank. This was done by creating a "peer group" profile of a number of banks, including Respondent, which had similar financial and asset characteristics.17 The comparative analysis revealed that there were a number of financial institutions, with similar financial and asset characteristics, operating in the same economic environment as the Respondent, most of which did not experience Respondent's financial and operational weaknesses. The undersigned concludes that Respondent's financial problems were the result of its banking practices which were unsafe or unsound, rather than the local or national economy or other exogenous factors.

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.
   The response, certified by Rowe and continuing on to page 30, includes Merritt Capital. The undersigned recognizes that question 25 may not be identified directly as referring to affiliations within the qualified scope and definition of 12 U.S.C. §371c, but considers that Respondent, knowing that the charge was based on this section of the Code19 and on Rowe's certification of affiliation, had the obligation of going forward
17 FDIC Ex. 30; Tr. 601–615.

18 Respondent's argument that control must first be found to exist after hearing before it can be said to have existed is disingenuous.

19 Notice of Charges, pages 8–12.
{{5-31-93 p.A-2218}}with evidence, if there were such, that Rowe's certification did not relate to Section 371c affiliation in that Rowe did not exercise the control indicated.
   Covered transactions with affiliates may be conducted only as would not exceed 20 percent of Respondent's capital stock and surplus. Said capital stock and surplus constituted $15,911,000 (FDIC Ex. 2, 19), and 20 per cent of that figure is $3,182,200. Covered transactions totalled $3,580,000 (FDIC Ex. 2/19. JS 69), of which $104,000 relates to Merritt Capital. Thus, not only did the total covered transactions exceed the 20 per cent limit ($3,580,000 exceeds $3,182,000), but the total without including the $104,000 relating to Merritt Capital, leaving $3,476,000, still exceeded the limit.

I. Discontinuance or Correction
of Practices

   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.
   In Zale Corporation and Corrigan-Republic, Inc. v. Federal Trade Commission, 473 F.2d 1317 (5th Cir. 1973), the defendant contended that it had stopped all illegal practices before issuance of a cease and desist order, thereby extinguishing the need for such order. The court, in dismissing a motion to enjoin the issuance of the order, stated:
    [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.
Id. at 1320.
   The Zale court clearly recognized that an administrative cease and desist order is not only designed as a tool to stop abusive or unlawful practices, but also serves to deter and prevent future abuses. This concept was recognized by the court in Montgomery Ward & Co. v. Federal Trade Commission, 379 F.2d 666 (7th Cir. 1967), when it stated that "[v]oluntary discontinuance of a practice does not prohibit issuance of a cease and desist order, which operates prospectively."
Id. at 672.
   Moreover, the adjudicated decisions of the FDIC's Board of Directors and the applicable Federal cases construing the FDIC's powers under section 8(b) of the Act, 12 U.S.C. §1818(b), have consistently held that evidence of a bank's condition and practices arising after the issuance of a notice in an administrative proceeding is irrelevant and immaterial as to any issue presented for adjudication. Two court decisions, Bank of Dixie v. Federal Deposit Insurance Corporation, 766 F.2d 175 (5th Cir. 1985), and First State Bank of Wayne County v. Federal Deposit Insurance Corporation, 770 F.2d 81 (6th Cir. 1985), specifically dealt with the issue of the relevancy of circumstances and actions occurring subsequent to the commencement of an enforcement action by the FDIC. In both cases, the FDIC decision that such evidence was irrelevant was affirmed.21
   In Bank of Dixie, the bank sought review of an Order to Cease and Desist issued by the FDIC against the bank as a result of
20 Prior to the commencement of the evidentiary hearing, FDIC Enforcement Counsel filed a Motion in Limine to limit the proof which the Bank might offer regarding the Bank's post-Notice practices and condition. By oral ruling, with the grounds and reasoning stated, the motion was granted. (Tr. 272–275).

21 The decision of the FDIC's Board of Directors concerning Bank of Dixie is codified at FDIC-83-172b, 1 P-H FDIC Enf. Dec. ¶5030 (1984); the discussion relative to this issue is found at pages A-336-337. The decision concerning First State Bank of Wayne County is reported at FDIC-83-132b, 1 P-H FDIC Enf. Dec. ¶5024 (1984); the relevant discussion is set forth at pages A-229-230.
{{5-31-93 p.A-2219}}unsafe or unsound practices engaged in by the bank, including hazardous lending and lax collection practices, an inadequate reserve for loan losses, an excessive volume of overdue loans, management whose policies were detrimental to the bank, and inadequate supervision by Respondent's board of directors of Respondent's officers and employees. The bank contended, in part, that the FDIC had failed to consider evidence that the bank had ceased the offensive practices and evidence of improvements in Respondent's operations. The court rejected Respondent's argument that the evidence of subsequent improvement was relevant and held that:
    [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.)
   In First State Bank of Wayne County, the bank appealed from the issuance of an Order to Cease and Desist by the FDIC on the grounds that the FDIC could not order the bank to desist from engaging in unsafe or unsound practices because the bank had voluntarily ceased the offensive practices. The court declined to accept Respondent's argument and concluded that an order may be appropriate to prevent future violations, even upon a showing that the bank had discontinued the offending practices. Specifically, the court adopted the Administrative Law Judge's analysis and conclusion that:
    [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.)
   Other courts, in considering the power of another Federal bank regulatory agency, the Office of the Comptroller of the Currency, have also determined that the discontinuance of practices and violations which prompted the agency action, whether before or after the commencement of the action, is no bar to the issuance of an Order to Cease and Desist. See, First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 681, 682, 683 (5th Cir. 1983); and del Junco v. Conover, 682 F.2d 1338, 1340 (9th Cir. 1982), cert. denied 459 U.S. 1146 (1983).
   Most recently in the Matter of The Stephens Security Bank, Stephens, Arkansas, FDIC-89-234b, 2 P-H FDIC Enf. Dec. ¶5168 (1991), the FDIC's Board of Directors determined that:
    [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.

Id. at A-1791.22

   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-


22 In accord with this determination is the Board's ruling in In the Matter of Bank of Salem, Salem, Arkansas, FDIC-89-229b, 2 P-H FDIC Enf. Dec. ¶5164 (1991) at A-1663-1664.
{{5-31-93 p.A-2220}}tices and violations of applicable laws and regulations.
   The objective of this proceeding is not to punish Respondent, but to return it to sound financial condition through formal corrective measures implemented by an Order to Cease and Desist. The fact that there may have been limited improvement in certain aspects of Respondent's condition and operation does not indicate or establish that unsafe or unsound practices and violations of law and regulations will not recur. If the scope of the FDIC's cease and desist powers is circumscribed on the basis of putative corrective measures, the FDIC will be left without an effective remedy should the offensive practices and conditions recur. Where unlawful practices have been discontinued, the question of whether an Order to Cease and Desist is required is within the discretion of the appropriate regulatory agency, here the FDIC. See generally, Cotherman v. Federal Trade Commission, 417 F.2d 587, 594 (5th Cir. 1969).23
   The FDIC has consistently held that prompt corrective measures are required to return a troubled bank to a safe and sound condition. In this regard, the FDIC's Board of Directors recently stated in its Decision in In the Matter of Bank of Salem, Salem, Arkansas, FDIC-89-229b, 2 P-H FDIC Enf. Dec. ¶5164 (1991) that:
    [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.

Id. at A-1660.

   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.

J. Final Summary

   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.

III. FINDINGS OF FACT

   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.


23 The above-referenced Federal banking law cases and the adjudicated decisions of the FDIC's Board of Directors make reference to the 1982 version of section 8(b) of the Act which provided, in pertinent part, that "[i]f any insured bank...is violating or has violated...a law, rule or regulation...the agency [FDIC] may issue and serve upon the bank ... a notice of charges with respect thereto." (Emphasis added). 12 U.S.C. §1818(b)(1)(1982). Section 8(b) of the Act was amended and expanded by sections 901 and 902 of FIRREA, Pub. L. No. 101-73, 103 Stat. 183, 447, 450-51 (1989). Notwithstanding the statutory amendments, the above referenced authority is fully consistent with the plain language of the current version of section 8(b) of the Act which provides, in pertinent part, that "[i]f in the opinion of the appropriate Federal banking agency [here the FDIC] any depository institution [here the Bank] is engaging or has engaged in an unsafe or unsound practice in conducting the business of the [bank] ... or is violating or has violated a law, rule or regulation...the agency [FDIC] may issue ... a notice of charges in respect thereto." (Emphasis added). 12 U.S.C. §1818(b)(1)(1989).
{{5-31-93 p.A-2221}}
A. General Findings

   1. The Bank is and was, at all times pertinent to this proceeding, a corporation existing and doing business under the laws of the State of Florida, having its principal place of business in Merritt Island, Florida. (JS ¶1).
   2. At all times pertinent to this proceeding, Lewis H. Berman, G. Leonard Gioia, Sebron E. Kay, Rodney S. Ketcham, Maxwell C. King, Morris A. Rowe, Robert C. Seelman Ruth K. Smith, Leonard Spielvogel, Val M. Steele, Richard H. Stottler, Jr., and C. Wayne Thompson served as Respondent's board of directors and were "institution-affiliated parties" of the Bank as that term is defined in section 3(u) of the Act, 12 U.S.C. §1813(u). (JS ¶5; Tr. 89–90).
   3. At all times pertinent to this proceeding, Morris A. Rowe served as Respondent's president and chief executive officer. (JS ¶6).
   4. As Respondent's president and chief executive officer, Morris A. Rowe is and was, at all times pertinent to this proceeding, responsible for the day-to-day management of the Bank. (JS ¶7).
   5. At all times pertinent to this proceeding, 100 percent of the authorized and outstanding shares of Respondent's capital stock was owned and controlled by The American Bancorporation of the South, Merritt Island, Florida, a bank holding company. (JS ¶8).
   6. At all times pertinent to this proceeding, the Morris A. Rowe Trust owned and/or controlled 75 percent or more of the authorized and outstanding shares of capital stock of The American Bancorporation of the South, Merritt Island, Florida, a bank holding company. (JS ¶9).
   7. The FDIC conducted examinations of the Bank as of the close of business on December 31, 1988, and February 4, 1991, and prepared written Reports of Examination, copies of which were furnished to the Bank. (JS ¶11; FDIC Exs. 2; 4).
   8. At all times pertinent, the below-designated companies were "affiliates" of Respondent as acknowledged and admitted by Respondent's President, Morris A. Rowe, at paragraph 25 of the "Officer's Questionnaire dated March 6, 1991, and submitted by Respondent to the FDIC in conjunction with the FDIC's examination of Respondent as of February 4, 1991:
   (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.
   (FDIC Ex. 2/23, 30).
   9. The Office of the Comptroller, Department of Banking and Finance, State of Florida conducted an examination of the Bank as of the close of business on December 31, 1989, and prepared a written Report of Examination, a copy of which was furnished to the Bank. (JS ¶12; FDIC Ex. 3).
   10. On January 16, 1992, the FDIC issued a Notice of Charges and of Hearing against the Bank in this matter. (JS ¶13).
B. Capital and Asset Structure

   11. As of December 31, 1990:
   (a) Respondent's Tier 1 capital equaled $14,786,000;
   (b) Respondent's adjusted Tier 1 capital equaled $14,762,000;
   (c) Respondent's Tier 2 capital equaled $1,165,000;
   (d) Respondent's total capital equaled $15,951,000;
   (e) Respondent's total equity capital and reserves equaled $15,991,000;
   (f) Respondent's total assets, consisting primarily of loans, cash, securities, fixed assets, investment in unconsolidated subsidiaries, and Other Real Estate ("ORE") equaled $204,586,000;
   (g) Respondent's adjusted Part 325 total assets equaled $205,912,000;
   (h) Respondent's total deposits equaled $185,725,000;
   (i) Respondent's gross loans equaled $109,592,000;
   (j) Respondent's total loans, i.e., gross loans less unearned income in the amount of $888,000, equaled $108,704,000;
   (k) Respondent's net loans, i.e., gross loans less unearned income and less the allowance for loan and lease losses, equaled $107,539,000; and
   (l) Respondent's allowance for loan and lease losses equaled $1,165,000. (JS ¶16).
12. As of December 31, 1990:
{{5-31-93 p.A-2222}}
   (a) Respondent's Tier 1 capital in the amount of $14,786,000 consisted of common shareholders' equity, surplus and undivided profits in the cumulative amount of $14,826,000 less $25,000 in assets classified "Loss" and less $15,000 in estimated contingent liabilities loss;
   (b) Respondent's adjusted Tier 1 capital in the amount of $14,762,000 consisted of Respondent's Tier 1 capital less $24,000 in assets classified "Doubtful;"
   (c) Respondent's Tier 2 capital in the amount of $1,165,000 consisted of Respondent's allowance for loan and lease losses; and
   (d) Respondent's total capital in the amount of $15,951,000 equaled the sum of Respondent's Tier 1 capital and Tier 2 capital. (JS ¶17; FDIC Ex. 12).
   13. Respondent's capital stock and surplus equaled $15,991,000 as reflected in Respondent's Report of Condition and Income filed with the FDIC as of December 31, 1990. (JS ¶55; FDIC Ex. 5).
   14. The purpose of a bank's capital account is:
       (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).

C. Decline in the Level of Adjusted
Capital and Reserves

   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).

D. Poor Quality Assets and Contingent
Liabilities
   18. As of February 4, 1991:
       (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).
   19. As of February 4, 1991:
       (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).
   20. As of February 4, 1991:
       (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).
   21. As of February 4, 1991:
       (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).
   22. The level of Respondent's total adversely classified items has increased in dol- {{5-31-93 p.A-2223}}lar volume, as a percent of total equity capital and reserves and as a percent of total assets as follows:
       (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).
   23. The level of Respondent's assets and contingent liabilities adversely classified "Substandard" has increased from $12,137,000 as shown in the FDIC Report of Examination of Respondent as of December 31, 1988, to $14,209,000 as of December 31, 1989, to $25,524,000 as of February 4, 1991. (JS ¶27; FDIC Exs. 2/7; 3/8; 4/8).
   24. The level of Respondent's adversely classified loans, which comprises the largest portion of Respondent's adversely classified assets, has increased in dollar volume, as a percent of total equity capital and reserves and as a percent of total loans as follows:
       (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).
   25. The total of Respondent's adversely classified loans in the amount of $15,888,000 as of February 4, 1991, included $9,528,000 in loans not previously adversely classified and $4,099,000 in further advances on loans not previously adversely classified. This represents a significant increase in the classification of loans on Respondent's books as of December 31, 1988. (JS ¶29; FDIC Ex. 2/3, 74).

E. Nonaccrual Loans

   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:

(a) Robert & Barbara
Barnas $369,000
(b) William I. Campbell $30,000
(c) D & S Real Estate, d/b/a
Caballeros Mexican
Restaurant $398,000
(d) Dolphins Leap, Inc. $467,000
(e) Earl R. Cochran Paving $255,000
(f) H. Jerry Harrington $38,000
(g) R. K. Huggins $30,000
(h) Nadir Khan $14,000
(i) Little Paper, Inc. $47,000
(j) V. R. Monto $3,000
(k) North East Mortgage
Company $8,000

{{5-31-93 p.A-2224}}

(l) A. O'Donnel $77,000
(m) Robert E. Ramsey $31,000
(n) Sibson Realty, Inc. $3,000
(o) R. L. Stroud $33,000
(p) Charles & Paula
Summers $480,000
(q) Louis & Edith
Weiczorsck $327,000.

   (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).

G. Inadequate Allowance for
Loan and Lease Losses

   33. The purpose of an allowance for loan and lease losses is to absorb potential losses in those loans and leases adversely classified, as well as other unrecognized or unanticipated losses in loans and leases. (JS ¶58; Tr. 51).
   34. During the FDIC examination of Respondent as of February 4, 1991, loans and other assets of Respondent were examined and analyzed for asset quality and assigned a designated classification of "Substandard," "Doubtful" or "Loss." (Tr. 31–42; FDIC Ex. 2/2-3, 7).
   35. It has been the general experience of the FDIC that loans classified "Loss" in an FDIC examination are considered uncollectible and are of such little value that their continuance as bankable assets is unwarranted and, therefore, should not be carried on a bank's books. (Tr. 38–39; FDIC Ex. 1/90-92).
   36. It has been the general experience of the FDIC that the inherent amount of loss that will be sustained by a bank for loans that are adversely classified "Doubtful" is approximately 50 percent of the gross amount of such loans. (Tr. 39, 54; FDIC Ex. 1/90).
   37. It has been the general experience of the FDIC that the inherent amount of loss that will be sustained by a bank for loans that are adversely classified "Substandard" is between 10 and 20 percent of the gross amount of such loans. (Tr. 39, 42, 54–55).
   38. As of December 31, 1990, Respondent's allowance for loan and lease losses equaled $1,165,000. (JS p 31; FDIC Ex. 2/5, 7, 12).
   39. As of December 31, 1990, Respondent's allowance for loan and lease losses equaled 1.07 percent of Respondent's total loans. (JS ¶31; FDIC Ex. 2/5, 12).
   40. As of February 4, 1991, Respondent's allowance for loan and lease losses equaled only 6.59 percent of Respondent's total overdue loans and leases in the amount of $17,687,000 and only 13.84 percent of Respondent's nonaccrual loans in the amount of $8,420,000. (JS ¶35).
   41. As of December 31, 1990, one-half of Respondent's loans adversely classified "Doubtful" equaled $23,500, which amount was subject to immediate charge off against the allowance for loan and lease losses, (FDIC Ex. 2/7).
   42. The charge off of the adversely classified loans described in paragraph 41 above totaling $23,500 would effectively reduce Respondent's allowance for loan and lease losses by that amount. (Tr. 42).
   43. As of December 31, 1990, Respondent's loans adversely classified "Substandard" equaled $15,841,000. (FDIC Ex. 2/7).
   44. It has been Respondent's experience that the inherent amount of loss sustained in regard to loans that are adversely classified "Substandard" is approximately 18 percent of the gross amount of such loans. (FDIC Ex. 2/74; Tr. 55–56).
   45. As of December 31, 1990, 50 percent of Respondent's loans adversely classified "Doubtful" in the amount of $23,500 when aggregated with 18 percent of loans adversely classified "Substandard" in the amount of $2,851,380 equaled $2,874,880 or 246.77 percent of Respondent's total allowance for loan and lease losses. (FDIC Ex. 2/7).
   46. As of December 31, 1990, Respondent's allowance for loan and lease losses was deficient by at least the amount of $1,709,880. This deficiency is derived by an arithmetic calculation of the difference between the percent of loss inherent in Respondent's adversely classified assets, in the amount of $2,874,880, and the amount of Respondent's allowance for loan and lease {{5-31-93 p.A-2225}}losses, in the amount of $1,165,000. FDIC Ex. 2/7).
   47. As of December 31, 1990, Respondent's allowance for loan and lease losses was inadequate to provide for probable additional loss in the remaining loans adversely classified "Doubtful" and "Substandard" and in loans not adversely classified. (Tr. 42; FDIC Ex. 2/5).
   48. Respondent's allowance for loan and lease losses in the amount of $1,165,000 was inadequate in relation to the excessive risk inherent in Respondent's loan portfolio. (FDIC Ex. 2/5).
   49. The underfunding of Respondent's allowance for loan and lease losses is attributable to the failure of Respondent's management to assess and identify adequately the risks inherent in Respondent's loan portfolio. (FDIC Ex. 2/5).
   50. The failure of Respondent to provide for an adequate allowance for loan and lease losses resulted in an erroneous inflation of Respondent's earnings, overstatement of Respondent's capital, and improper concealment of the deteriorating quality of Respondent's loan portfolio as of December 31, 1990. (Tr. 51; FDIC Ex. 2/2-5).
   51. Generally accepted standards of prudent operations for a bank with the level of adversely classified loans in relation to its total loans and in relation to its equity capital similar to that of Respondent would require a provision in the allowance for loan and lease losses as follows:
       (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).

H. Decline in Earnings

   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).

Increase in the Level of ORE and in the
Level of Adversely Classified ORE

   55. ORE is real estate held by Respondent that formerly secured a loan to a borrower who defaulted in the repayment of the obligation. (Tr. 58–59).
   56. The level of Respondent's ORE has increased in dollar volume and as a percent of total assets as follows:
       (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).
   57. The level of Respondent's adversely classified ORE has increased in dollar volume, as a percent of total equity capital and reserves and as a percent of total ORE as follows:
       (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).
{{5-31-93 p.A-2226}}
   58. As of February 4, 1991, Respondent had outstanding extensions of credit to the following individuals in the specified amounts concerning which Respondent had initiated foreclosure proceedings against the collateral real estate:

(a) Anthony & Anna
Novotny $74,000
(b) Sean Reagin &
Lori Glick $38,000
(c) Guy J. Scarpaci $77,000
(d) L. D. Wallace $51,000.

   (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:

(a) American Life Styles $644,253
(b) Brevard Country Club $319,439
(c) B & V Rentals $108,000
(d) Thomas M. Dolan $6,200
(e) Thomas D. Eberhardt $76,900
(f) G & D Restaurant $469,100
(g) Roger R. Graefe $72,251
(h) G. Ray Griffin $250,000
(i) G. Ray Griffin $367,500
(j) Jerry H. Harrington $59,482
(k) Lester S. Hudson $13,810
(l) Louie C. Human $167,306
(m) Marinoff Construction
Company $576,698
(n) James E. Morgan $86,729
(o) Con Nowakowski $102,100
(p) Oakleaf Investments $997,200
(q) Oak Tree Gardens, Inc. $48,000
(r) Paula Ruprecht $30,800
(s) Topline Sales $250,000
(t) Frank Tsamoutales $20,300
(u) Frank Tsamoutales $158,458
(v) Viking Management $133,100
(w) Wedgewood Park
Development $711,045
(x) Gilbert H. Wichert $33,741

   (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:

(a) William Moulton $61,148
(b) Michael Murray $50,000
(c) Elizabeth Wilson $69,183.

   (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).
   65. As of February 4, 1991, Respondent had failed to provide for an adequate diversification of risk in its investment of funds. (FDIC Ex. 2/4, 73).

K. Capitalization of Interest

   66. As of February 4, 1991, Respondent renewed and/or extended the due dates with respect to the loans to the following individuals or entities by acceptance of a separate note for the payment of accrued but unpaid interest charges or by additional advances to pay the interest charges:
       (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).
   67. The practice of renewing and/or extending the due dates of loans by acceptance of a separate note for the payment of accrued but unpaid interest charges or by additional advances to pay the interest charges can have the following consequences:
       (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).

L. Hazardous Lending and
Lax Collection Practices

   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).
   72. The FDIC examiner's assignment of an adverse classification to a loan is an expression of the degree of the risk to Respondent that the loan will not be fully paid by the borrower in accordance with the stated terms. (FDIC Ex. 1/88-93, 96–97).
   73. As of February 4, 1991, Respondent had extended credit to American Pioneer Partners, Inc. in the amount of $1,307,966. (FDIC Ex. 2/50).
   74. The extension of credit to American Pioneer Partners, Inc. was adversely classified "Substandard" in the FDIC Report of Examination of Respondent as of February 4, 1991. The facts supporting this adverse classification were: (1) Respondent had extended credit to a borrower which lacked sufficient repayment ability; (2) Respondent had extended credit in violation of its written loan policy; (3) Respondent had initiated foreclosure proceedings against the borrower's undeveloped collateral real estate; (4) The extension of credit was in a nonaccrual status; and (5) The extension of credit was internally classified "Substandard" by Respondent. (FDIC Exs. 2/50; 6/1-2; 8/1-3).
   75. As of February 4, 1991, Respondent had extended credit to Joseph D. Foley and Joan D. Foley in the amount of $572,084. (JS ¶43; FDIC Ex. 2/50).
   76. The extension of credit to Joseph D. Foley and Joan D. Foley was adversely classified "Substandard" in the FDIC Report of Examination as of February 4, 1991. The facts supporting this adverse classification were: (1) Respondent had extended credit without establishing and/or enforcing ade- {{5-31-93 p.A-2228}}quate and realistic repayment plans; (2) Respondent had failed adequately to monitor credit plans; (2) Respondent had failed adequately to monitor credit extended and failed to initiate timely collection of the extension of credit; (3) Respondent extended credit in violation of its written loan policy; and (4) Respondent had initiated foreclosure proceedings against the collateral real estate. (FDIC Exs. 2/50; 6/1-2; 8/4-5).
   77. As of February 4, 1991, Respondent had made six extensions of credit to Leonard G. Gioia in the cumulative amount of $976,234. The borrower was a director of Respondent. (FDIC Ex. 2/51-52, 72; Tr. 89).
   78. A portion of the extensions of credit to Leonard G. Gioia in the amount of $623,000 was adversely classified "Substandard" in the FDIC Report of Examination of Respondent as of February 4, 1991. The facts supporting this adverse classification were: (1) Respondent had extended credit to a borrower who lacked sufficient repayment ability; (2) Respondent had extended credit without establishing and/or enforcing adequate and realistic repayment plans; (3) Respondent had extended credit in violation of its written loan policy; and (4) Respondent had extended interim construction financing without assurance of a permanent financing commitment from another financial institution. (FDIC Exs. 2/51-52; 6/1-2; 8/6-26).
   79. As of February 4, 1991, Respondent had made five extensions of credit to G.R. Griffin and his related business interests in the cumulative amount of $3,084,169. (FDIC Ex. 2/53-54; Tr. 89).
   80. The extensions of credit to G.R. Griffin and his related business interests were adversely classified "Substandard" in the FDIC Report of Examination of Respondent as of February 4, 1991. The facts supporting this adverse classification were: (1) Respondent had extended credit to borrowers who lacked sufficient repayment ability; (2) Respondent had renewed the extensions of credit with nominal or no principal reduction; (3) Respondent had included accrued and unpaid interest in the principal amount of renewed extensions of credit; (4) Respondent had extended credit in violation of its written loan policy; (5) The extensions of credit had been classified "Substandard" at the December 31, 1989 State examination of Respondent and there had been no improvement in the quality of the extensions of credit since that time; and (6) All of the extensions of credit were past due and in a nonaccrual status. (FDIC Exs. 2/53-54, 72; 6/1-2; 8/27/ 61).
   81. As of February 4, 1991, Respondent had made six extensions of credit to Edgar E. Griffis and his related business interests in the cumulative amount of $1,999,005. The borrower was a former director of Respondent. (JS ¶44; FDIC Ex. 2/55).
   82. A portion of the extensions of credit to Edgar E. Griffis and his related interests in the cumulative amount of $1,663,000 was adversely classified "Substandard" in the FDIC Report of Examination of Respondent as of February 4, 1991. The facts supporting this adverse classification were: (1) Respondent had extended credit to borrowers who lacked sufficient repayment ability; (2) Respondent failed adequately to monitor the extensions of credit and failed to initiate timely collection of the extensions of credit; (3) The extensions of credit were adversely classified "Substandard" at the December 31, 1988 FDIC examination of Respondent and there had been no improvement in the quality of the extensions of credit since that time; (4) The extensions of credit had been internally classified "Substandard" by Respondent; and (5) The borrower and his related business interests had initiated chapter 7 bankruptcy proceedings. (FDIC Exs. 2/55; 6/1-2; 8/62-72).
   83. As of February 4, 1991, Respondent has made twelve extensions of credit to Ruth K. Smith and her related business interests in the cumulative amount of $1,128,506. The borrower was a director of Respondent. (FDIC Ex. 2/56-58. Tr. 89–90).
   84. The extensions of credit to Ruth K. Smith and her related business interests were adversely classified "Substandard" in the FDIC Report of Examination of Respondent as of February 4, 1991. The facts supporting this adverse classification were: (1) Respondent had extended credit to borrowers who lacked sufficient repayment ability; (2) Respondent had extended credit without establishing or enforcing adequate and realistic repayment plans; (3) Respondent had renewed the extensions of credit with nominal or no principal reduction; and (4) Respondent extended credit with marginal collateral protection. (FDIC Exs. 2/56-58; 6/1-2; 8/73-136).
   85. As of February 4, 1991, Respondent had made nine extensions of credit to Val {{5-31-93 p.A-2229}}M. Steele and his related business interests in the cumulative amount of $5,001,830. The borrower was a director of Respondent. (FDIC Ex. 2/59-61; Tr. 90).
   86. A portion of the extensions of credit to Val M. Steele and his related business interests in the amount of $2,765,000 was adversely classified "Substandard" in the FDIC Report of Examination of Respondent as of February 4, 1991. The facts supporting this adverse classification were; (1) Respondent had extended credit to borrowers who lacked sufficient repayment ability; (2) Respondent had extended credit without establishing or enforcing adequate and realistic repayment plans; (3) Respondent had renewed the extensions of credit with nominal or no principal reduction; and (4) Respondent had extended credit with marginal collateral protection. (JS ¶41; FDIC Exs. 2/59-61; 6/1-2; 8/137-155).
   87. As of February 4, 1991, Respondent had extended credit to Tompkins Land & Housing, Inc. in the amount of $1,739,034. (JS ¶45; FDIC Ex. 2/62).
   88. The extension of credit to Tompkins Land & Housing, Inc. was adversely classified "Substandard" in the FDIC Report of Examination of Respondent as of February 4, 1991. The facts supporting this adverse classification were: (1) Respondent had extended credit to a borrower which lacked sufficient repayment ability; (2) Respondent had extended credit without establishing or enforcing adequate and realistic repayment plans; (3) Respondent had renewed the extension of credit with nominal or no principal reduction; (4) Respondent had included accrued and unpaid interest in the principal amount of the renewed extensions of credit; (5) Respondent had internally adversely classified the extension of credit "Substandard;" and (6) Respondent had initiated foreclosure proceedings against the collateral real estate. (FDIC Exs. 2/62, 72; 6/1-2; 8/156-165).
   89. The FDIC examiners' classifications of "Substandard" in regard to the extensions of credit described in paragraphs 73 through 88 above were reasonable under the circumstances and were in accordance with the FDIC's standards and guidelines concerning loan classification. (FDIC Ex. 2/50-62).
   90. The lending and collection practices described in paragraphs 73 through 88 above are contrary to generally accepted standards of prudent bank operations, the possible consequence of which, if continued, would be abnormal risk of loss or other damage to Respondent. (JS ¶59; FDIC Exs. 1/190; 2/50-62; 6/1-2; Tr. 34–35).
   91. Respondent engaged in hazardous lending and lax collection practices as a result of the extensions of credit described in paragraphs 73 through 88 above. (JS ¶59; FDIC Exs. 1/109; 2/50-62; 6/1-2; Tr. 35–44).
M. Conditions Resulting From Hazardous
Lending and Lax Collection Practices
   92. As of February 4, 1991, the overall condition of Respondent's loan portfolio was poor and there was a significant likelihood of further deterioration. (TR. 34–35; FDIC Ex. 2/3, 50–75).
   93. The increase in adversely classified loans occurred, in part, as the result of deterioration in previously unclassified loans. (Tr. 55–58; FDIC Ex. 2/2-3).
   94. As of February 4, 1991, adversely classified loans in the amount of $15,888,000 and adversely classified ORE in the amount of $8,839,000 were excessively high. (Tr. 35–50, 58–60; FDIC Ex. 2/2-3.
   95. As of February 4, 1991, the excessively high volume of Respondent's adversely classified loans and adversely classified ORE represented a significant deterioration in the quality of Respondent's loan portfolio since the December 31, 1988 FDIC examination of Respondent. (Tr. 35–60; FDIC Ex. 2/2-3).
   96. As of February 4, 1991, Respondent had an inadequate allowance for loan and lease losses. (Tr. 51–59; FDIC Ex. 2/5).
   97. As of February 4, 1991, Respondent had an excessive volume of adversely classified loans and adversely classified ORE in relation to its total assets and equity capital which is indicative of significant and severe asset problems which can have a significant adverse impact on Respondent's financial condition. (Tr. 35–60; FDIC Ex. 2/2-5).
   98. As of February 4, 1991, Respondent had an excessive volume of nonaccrual and past due loans. (Tr. 44–47; FDIC Ex. 2/2-5, 7, 75).
   99. As of February 4, 1991, Respondent had acquired an excessively high volume of ORE. (Tr. 59–60; FDIC Ex. 2/65-71).
{{5-31-93 p.A-2230}}    100. As of February 4, 1991, contingent liabilities associated with Respondent's lending practices in the amount of $869,000 were excessively high. (FDIC Ex. 2/7, 72).
N. Extensions of Credit to Affiliates and
to Individuals Individuals Who
Pledges Securities of Affiliates
   101. As of February 4, 1991, Respondent had outstanding extensions of credit in the referenced amounts to the below-designated companies which were affiliates of Respondent;

(a) Merritt Capital
Corporation $104,000
(b) Sisoro, Inc. $72,000
(c) C&R Joint Venture,
Inc. $1,277,000
(d) Southern Capital
Corporation $1,074,000
Total $2,527,000.

   (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:

(a) G. Leonard Gioia $258,000
(b) G. Leonard Gioia $137,000
(c) G. Leonard Gioia,
Trustee $34,000
(d) G. Leonard Gioia,
Trustee $8,000
(e) Sebron E. Kay $90,000
(f) Rodney S. Ketcham $60,000
(g) Arnold Liberman $226,000
(h) Arnold Liberman $30,000
(i) Morris A. Rowe $150,000
(j) Ruth K. Smith $60,000
Total $1,053,000.

   (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).

P. Unsatisfactory Management

   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}}

Q. Uniform Composite Rating

   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).

R. Peer Comparison

   120. The level of Respondent's adversely classified assets and adversely classified ORE is extremely high both independently and in comparison to the level of adverse classifications in peer group financial institutions (FDIC Ex. 10).

S. Economic Conditions

   121. The Space Shuttle Challenger blew up in early 1986. The unanticipated shuttle disaster in 1986 severely damaged the economy of Brevard County, Florida, as space launches were cancelled throughout the remainder of 1986. The temporary closing of the space program for the remainder of 1986 had a ripple effect in Brevard County, on employment.
   122. In late 1986, Congress passed a tax reform act that adversely affected Brevard County as well as other real estate growth-dependent areas. The economic interruptions attributable to the shuttle disaster and the phased in tax act were neither reasonably foreseeable nor fully compensable by diligent anticipatory planning by a reasonable board of directors.
   123. The Respondent anticipated an erosion in the real estate economy in 1988, which coincided with local implementation of the Florida Growth Management Act. The economic purpose of the Act is to assure that infrastructure is available concurrent with population growth so that when growth occurs it does not degrade the quality of service in roads and there are sufficient water, sewer, parks, garbage collection and other criteria in the plan that are required to be met. The economic effect of the Act is that substantial monies would have to be spent by the petitioning land owner to make the appropriate public improvements prior to being able to develop that property. Brevard County was the first county in Florida to enact and enforce its own plan under the Florida Growth Management Act.
   124. The adverse local economic conditions alleged by Respondent were not the proximate cause of the decline in Respondent's financial condition. (Tr. 43).
   125. The adverse local economic conditions alleged by Respondent were irrelevant to the issue of whether Respondent, acting through its officers and directors, had engaged in practices which were contrary to generally accepted standards of prudent bank operation as follows:
{{5-31-93 p.A-2233}}
   (a) engaging in hazardous lending and lax collection practices (Tr. 43–44);
   (b) maintaining an excessive volume of poor quality loans and other assets in relation to total assets and capital;
   (c) maintaining an excessive volume of adversely classified loans and adversely classified ORE (Tr. 34–35);
   (d) maintaining an excessive volume of contingent liabilities (FDIC Ex. 2/7, 72);
   (e) engaging in practices which produced inadequate operating income (Tr. 60–66);
   (f) operating with excessively high overhead expenses (Tr. 60–66);
   (g) engaging in practices which resulted in a significant reduction in earning assets (Tr. 60–66);
   (h) engaging in practices which produced a high volume of ORE (Tr. 35–40);
   (i) maintaining an inadequate allowance for loan and lease losses (Tr. 51–58);
   (j) failing to provide for an adequate diversification of risk in investment of funds (Tr. 66–68);
   (k) operating with a loan policy that was inadequate for the volume, kind and quality of loans held (FDIC Ex. 2/17);
   (l) engaging in violations of applicable Federal banking law (FDIC Ex. 2/19);
   (m) operating with management whose policies and practices are detrimental to Respondent and jeopardize the safety of Respondent's deposits (Tr. 14–104); and
   (n) operating with a board of directors which failed to provide adequate supervision over and direction of Respondent. (Tr. 69, 73).
   126. Respondent's poor financial condition as of February 4, 1991, resulted principally from the imprudent conduct and practices and the omissions of Respondent's officers and directors in managing the business and affairs of Respondent and not from general adverse economic circumstances and/or adverse local economic conditions. (FDIC Ex. 30; Tr. 43).

R. Additional Factors

   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.

IV. PROPOSED CONCLUSIONS OF
LAW

A. Jurisdiction and Burden of Proof

   1. Respondent is and was, at all times pertinent to this proceeding, an insured State nonmember bank subject to the Act, 12 U.S.C. §§1811-1831t, and the FDIC's Rules and Regulations, 12 C.F.R. Chapter III. (JS ¶2).
   2. Respondent is and was, at all times pertinent to this proceeding, subject to section 23A of the Federal Reserve Act, 12 U.S.C. §371c, made applicable to insured state nonmember banks pursuant to section 18(j)(1) of the Act, 12 U.S.C. §1828(j)(1). (JS ¶4).
   3. The FDIC has jurisdiction over Respondent, Respondent's "institution-affiliated parties", as that term is defined in section 3(u) of the Act, 12 U.S.C. §1813(u), and the subject matter of this proceeding. (JS ¶15).
   4. The FDIC has the authority to issue an Order to Cease and Desist against Respondent pursuant to section 8(b) of the Act, 12 U.S.C. §1818(b). (JS ¶14).
   5. The FDIC's burden of proof in this proceeding in one of a preponderance of the evidence. Steadman v. Securities and Exchange Commission, 450 U.S. 91, 102 (1981).
{{5-31-93 p.A-2234}}

B. Opinions and Conclusions of FDIC
Examiners

   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.

C. Unsafe or Unsound Banking Practices

   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.
   12. Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by maintaining an excessive volume of adversely classified loans and adversely classified ORE which resulted from Respondent's hazardous lending and lax collection practices.
   13. As a result of Respondent's excessive volume of adversely classified loans and adversely classified ORE, Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by operating with an excessive volume of poor quality assets in relation to its total assets and in relation to its equity capital.
   14. Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by operating with an excessive volume of adversely classified contingent liabilities.
   15. Respondent has 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 practices which produced inadequate operating income by:
       (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.
   16. Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by failing to provide and maintain an adequate allowance for loan and lease {{5-31-93 p.A-2235}}losses for the volume, kind and quality of loans held.
   17. Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by failing to provide for an adequate diversification of risk in Respondent's investment of funds by operating with an excessive concentration of credit in acquisition, development and construction loans, and related transactions.
   18. Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by operating with a loan policy which is inadequate for the volume, kind and quality of the loans held in that Respondent's loan policy failed to address adequately:
       (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.
   19. Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by operating with management whose policies and practices are detrimental to Respondent and jeopardize the safety of Respondent's deposits.
   20. Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by operating with a board of directors that had failed to provide adequate or effective supervision over and direction of Respondent to prevent unsafe or unsound banking practices and violations of law as described in paragraphs 15 through 115 of the Proposed Findings of Fact (pages 9–40, supra.).
   21. Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by operating with an excessive volume of overdue loans and nonaccrual loans.
   22. Respondent has 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 practices which produced inadequate earning assets.
   23. Respondent has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. §1818(b), by operating with excessively high overhead expenses.
   24. Respondent has 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 practices which produced an excessively high volume of ORE.
   25. Respondent has 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 imprudent and harmful practices which increased the risk of financial loss or other damage to Respondent.
   26. Respondent's declining financial condition and unsafe or unsound practices, as of February 4, 1991, were the result of actions, practices and omissions of Respondent's officers and directors and were not the result of adverse economic circumstances and/or a declining local economy.

D. Violations of Law

   27. Sections 23A(a)(1)(B) and 23A(b) (7)(D) of the Federal Reserve Act, 12 U.S.C. §§371c(a)(1)(B) and (b)(7)(D), made applicable to Respondent pursuant to section 18(j)(1) of the Act, 12 U.S.C. §1828(j)(1), combine to limit "covered transactions," as that term is defined in section 23A(b)(7) of the Federal Reserve Act, 12 U.S.C. §371c(b) (7), that Respondent and its subsidiaries may engage in with all of Respondent's affiliates and with persons who have pledged securities of an affiliate of Respondent as collateral security for a loan or extension of credit from Respondent to an amount not to exceed 20 percent of Respondent's capital stock and surplus.
{{5-31-93 p.A-2236}}
   28. At all times pertinent to this proceeding, the below-designated companies were "affiliates" of Respondent within the meaning of section 23A(b)(1)(A) of the Federal Reserve Act, 12 U.S.C. §371c(b)(1)(A), as certified in the Examination Report:
       (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.
   29. At all times pertinent to this proceeding, The American Bancorporation of the South, Merritt Island, Florida, Respondent's parent bank holding company, was an "affiliate" of Respondent within the meaning of section 23A(b)(1)(A) of the Federal Reserve Act, 12 U.S.C. §23A(b)(1)(A). (JS ¶8; 9; 50–52).
   30. The extensions of credit by Respondent to the above-referenced affiliated companies specified in paragraph 101 of the Proposed Findings of Fact (page 34, supra.) are and were, at all times pertinent to this proceeding, "covered transactions" within the meaning of section 23A(b)(7)(A) of the Federal Reserve Act, 12 U.S.C. §371c(b) (7)(A).
   31. The extensions of credit by Respondent to the above-referenced individuals specified in paragraph 102 of the Proposed Findings of Fact (pages 34–35, supra.) are and were, at all times pertinent to this proceeding, "covered transactions" within the meaning of section 23A(b)(7)(D) of the Federal Reserve Act, 12 U.S.C. §371c(b)(7)(D).
   32. The capital stock of Respondent's affiliate, The American Bancorporation, Merritt Island, Florida, pledged by the individuals to secure the repayment of the extensions of credit described in paragraph 102 of the Proposed Findings of Fact (pages 34–35, supra.) are "securities" within the meaning of section 23A(b)(9) of the Federal Reserve Act, 12 U.S.C. §371c(b)(9). (JS ¶56).
   33. As of February 4, 1991, the cumulative amount of Respondent's "covered transactions" with its affiliates and with the individuals who pledged securities of Respondent's affiliate to secure extensions of credit from Respondent exceeded 20 percent of Respondent's capital stock and surplus.
   34. As of February 4, 1991, Respondent violated section 23A(a)(1)(B) of the Federal Reserve Act, 12 U.S.C. §371c(a)(1)(B), because of the cumulative amount of Respondent's "covered transactions" with its affiliates and with the individuals who pledged securities of Respondent's affiliate to secure extensions of credit from Respondent exceeded 20 percent of Respondent's capital stock and surplus.
   35. Section 23A(c)(4) of the Federal Reserve Act, 12 U.S.C. §371c(c)(4), provides, in pertinent part, that Respondent shall not accept any "securities" issued by an affiliate of Respondent as collateral for a loan or extension of credit by Respondent to that affiliate or to any other affiliate of Respondent.
   36. As of February 4, 1991, Respondent had extended credit to its affiliates, C&R Joint Ventures, Inc. and Southern Capital Corporation, which extensions of credit were secured by the "securities" of Respondent's affiliate, The American Bancorporation of the South, Merritt Island, Florida.
   37. As of February 4, 1991, Respondent violated section 23A(c)(4) of the Federal Reserve Act, 12 U.S.C. §371c(c)(4), by making extensions of credit to its affiliates, C&R Joint Venture, Inc. and Southern Capital Corporation, which extensions of credit were secured by the securities of Respondent's affiliate, The American Bancorporation of the South, Merritt Island, Florida.

E. Relief Authorized

   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.

V. RECOMMENDED ORDER

   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

PROPOSED FINAL ORDER TO CEASE
AND DESIST
(Issued ____, 1993)

   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.

   [.4] (a) 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 charged off or classified, in whole or in part, "Loss" or "Doubtful" and is uncollected.
       (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.
   7. As of the effective date of this ORDER, the Bank shall not pay any cash or property dividends without the prior written consent of the Regional Director.
   8. Within 30 days from the effective date of this ORDER, the Bank shall take all necessary steps, consistent with sound banking practices, to eliminate and/or correct all violations of laws committed by the Bank, as described on page 6-a of the FDIC's Report of Examination of the Bank as of February 4, 1991. In addition, the Bank shall adopt appropriate procedures to ensure its future compliance with all applicable laws and regulations.
   9. Within 30 days from the effective date of this ORDER, the Bank shall correct the internal routine and control deficiencies as described on page 6-b of the FDIC's Report of Examination of the Bank as of February 4, 1991.
    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.
   12. Within 90 days from the effective date of this ORDER, the Bank shall submit to the Regional Director a written marketing plan for each parcel of real estate owned, directly or indirectly, by the Bank and/or any subsidiary of the Bank, other than real estate used as Bank premises, having a fair market value equal to or exceeding $500,000. Any real estate which will be held by the Bank and/or any subsidiary of the Bank for investment shall be supported by an independent appraisal which has been performed within the last 12 months and which will be updated no less frequently than every 18 months as long as this ORDER remains in effect.
   13. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER (1) in conjunction with the Bank's next shareholder communication and also (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe this 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.
   14. Within 90 days from the effective date of this ORDER, and every 90 days 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. All progress reports and other written responses to this ORDER shall be reviewed by the Bank's board of directors and made a part of the minutes of the appropriate board of directors' meeting.
   15. The provisions of this ORDER shall become effective ten (10) days from the date of its issuance and shall be binding upon the Bank, its institution-affiliated parties, and its successors and assigns. Further, the provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   By Direction of the Board of Directors.
   Dated at Washington, D.C., this ____ day of ____, 1993.

/s/ Hoyle L. Robinson,
Executive Secretary

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