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   [5213] In the Matter of Bay Bank & Trust Co., Panama City, Florida, Docket No. FDIC-92-313b (4-5-94)

   FDIC Board adopts ALJ recommendation and finds that a trust owning stock in the bank's holding company has "control" over the bank and that bank's poor {{6-30-94 p.A-2412}}condition a result of unsafe and unsound practices. FDIC orders bank to cease and desist from such practices as operating with poor management and with excessive volumes of adversely classified and nonperforming assets, following hazardous lending and lax collection practices, and violating Regulation O and Federal Reserve Act Section 23A.

      [.1] Federal Reserve Act §23A—Definition—Control
   Trust that owns 65 percent of the stock in bank holding company is a "company" under Section 23A and has control over the bank. Bank's transactions with the trust are covered by Regulation O and Section 23A.

In the Matter of

BAY BANK & TRUST CO.
PANAMA CITY,FLORIDA
(Insured State Nonmember Bank)
DECISION AND ORDER
TO CEASE AND DESIST

FDIC-92-313b

I. INTRODUCTION AND PROCEDURAL HISTORY

   This is a cease-and-desist action by the Federal Deposit Insurance Corporation ("FDIC") against Bay Bank & Trust Co., Panama City, Florida ("Respondent" or "Bank") pursuant to its authority under section 8(b) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(b)(1), and Part 308 of the FDIC rules of Practice and Procedure, 12 C.F.R. § 308.1, et seq. The action was initiated on November 13, 1992, by a Notice of Charges and of Hearing ("Notice") following a series of Bank examinations, the last of which, as of November 18, 1991, assigned the Bank a CAMEL1 rating of "4". Institutions rated "4" have a immoderate volume of serious weaknesses or a combination of other conditions that are unsatisfactory, FDIC Ex. 2 at 15.2
   The Notice charges that the Bank engaged in the following unsafe or unsound practices: engaging in hazardous lending and lax collection practices; having an excessive amount of adversely classified assets and contingent liabilities; engaging in practices which produced inadequate operating income and excessive loan losses, including operating with excessively high overhead expenses; failing to provide and maintain an adequate allowance for loan and lease losses ("ALLL") for the volume, kind and quality of loans held; operating with an unsatisfactory liquidity ratio; operating with inadequate capital; operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of the Bank's deposits; and operating with inadequate supervision by the board of directors. The Notice also alleges that Respondent violated section 22(h)(3) of the Federal Reserve Act ("Act"), 12 U.S.C. § 375b(3), and section 215.4(a) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. Part 215, as well as section 23A of the Act ("Section 23A"), 12 U.S.C. § 371c.3The alleged violations of law relate to transactions involving the JCJ Irrevocable Trust ("Trust"), whose trustee, John Christo III, was president of the Bank, and whose beneficiaries, John Christo, III, Irene L. Christo, and James Phillip Christo, were directors of the Bank.
   A hearing on the Notice was held before Administrative Law Judge Walter J. Alprin ("ALJ") on February 16–18 and June 28–29, 1993.4 The ALJ issued a Recommended De-


1 The CAMEL rating is the combined rating of the CAMEL system. CAMEL is the acronym used for capital, assets, management, equity, and liquidity. Institutions are rated on each area and also given a composite number from 1 through 5, 1 being the highest rating.

2 Citations to the record of this proceeding shall be as follows:
Recommended Decision "R.D. at ____."
Hearing transcripts "Tr. at ____."
Exhibits "FDIC Ex. ____," "Resp. Ex. ____."
Pleadings "FDIC Except. at ____," "Resp. Reply Br. at ____."
Joint Stipulation "J.S. ¶____."

3 Regulation O is applicable to the Bank pursuant to section 337.3 of the FDIC's Rules and Regulations, 12 C.F.R. § 337.3. Sections 22(h)(3) and 23A(c)(1) of the Act are applicable to the Bank pursuant to sections 18(j)(1) and (2) of the FDI Act, 12 U.S.C. § 1828(j)(1) and (2).

4 During the February hearing, FDIC Enforcement Counsel objected to the terms of a protective order previously agreed to by the parties and adopted by the ALJ. The ALJ ruled in favor of FDIC Enforcement Counsel but (Continued)

{{6-30-94 p.A-2413}}cision on December 10, 1993, finding that the imposition of a cease-and-desist order against the Bank is needed and justified and recommending the adoption of the cease-and-desist order proposed by FDIC Enforcement Counsel, with a few of the many modifications requested by Respondent.
   Both parties filed Exceptions to the Recommended Decision, in each case limited to a few specific provisions of the recommended cease-and-desist order.

II. STATEMENT OF THE CASE

   It is undisputed that the financial condition of the Bank deteriorated significantly as reflected in the examination reports for the FDIC examinations as of March 5, 1990 and November 18, 1991, and the State of Florida examination as of March 31, 1991, FDIC Ex. 4, 2, and 3, respectively. Respondent argued that its decline was caused by deterioration in the local and national economies; that it has made significant improvement since the last examination by the FDIC in November 1991; that it did not violate federal banking laws; and that the imposition of a cease-and-desist order, and in particular certain of the provisions proposed by FDIC Enforcement Counsel, is unwarranted. FDIC Enforcement Counsel argued that Respondent's financial deterioration was caused by existing and past unsafe or unsound practices as well as violations of the federal banking laws regulating loans to insiders and affiliates; and that having established that such practices and violations did occur, FDIC is entitled to require the imposition of a cease-and-desist order in the form proposed.
   The ALJ found that the Bank committed all but one of the unsafe or unsound practices alleged in the Notice,5 that the deterioration in the Bank's condition was due at least primarily to those practices and violations rather than to the poor economy, and that Respondent's condition had not improved significantly since the Notice was issued; and recommended the imposition of the cease-and-desist order proposed by FDIC Enforcement Counsel, with a few changes.

III. DISCUSSION

   The Board of Directors of the FDIC ("Board") adopts the carefully reasoned and well documented Recommended Decision of the ALJ, with a few minor technical corrections.6
1. Violations of Section 23A.

      [.1] The Board specifically notes that it agrees with the ALJ's rulings concerning violations of Section 23A with respect to transactions involving the Trust. The Board agrees that the Trust is a "company" as defined in section 23A(b)(6) of the Act, 12 U.S.C. § 371c(b)(6); and that the Trust has "control" over Florida Bay Banks, Inc., a bank holding company which owns 100 percent of the authorized and outstanding shares of the Bank's capital stock, and hence is an "affiliate" under section 23A(b)(1)(A).7
   The Board notes that even if the transac-


4Continued:permitted Respondent to seek immediate review. A Decision and Order on Request for Private Hearing issued by the Deputy Executive Secretary pursuant to delegated authority upon the advice and recommendation of the General Counsel denied Respondent's request to modify the ALJ's ruling, In the Matter of Bay Bank & Trust Co., Panama City, Florida, FDIC-92-313b, 1 P-H FDIC Enf. Dec. ¶8027 (May 13, 1993), and the hearing resumed in June.

5 The ALJ found that FDIC Enforcement Counsel did not, by a preponderance of the evidence, prove that overhead expenses were excessive. R.D. at 39.

6 The Board notes the following errors in the Recommended Decision:
Page 31, first paragraph, fourth sentence, "letter of credit" should be "line of credit."
Page 41, note 20, line 12, "do affect the" should be "do not affect the".

7 Section 23A(b)(3)(A)(i) of the Act provides that a company shall be deemed to have control over another company if such company owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the other company. The Trust owned 42,436 shares, or over 65 percent, of the common stock of Florida Bay Banks, Inc., J.S. ¶s 11–13. Respondent argued that this stock ownership does not constitute control because it represents only about 10.5 percent of total voting shares, while John Christo, Jr., the father of the beneficiaries of the Trust, and at the time of the transactions in question the chairman of the board and chief executive officer of the Bank, controls over 83 percent of the total voting shares of Florida Bay Banks, Inc. through his ownership of 379,906 shares, or 96.84 percent, of the preferred stock. See, Resp. Post-hearing Brief at 14, and Appendixes A and B thereto.
   The Trust clearly meets the definition of "control" provided in section 23A(b)(3)(A)(i). Respondent attempts to argue that the 83 percent control of John Christo, Jr., rebuts the presumption of control in that section. However, in order to rebut the presumption, the Bank must present evidence that a true lack of commonality of interests exists which defeats the presumed control. No such evidence was presented here. In fact, all evidence suggests a close identity of interests between the father, John Christo, Jr., and his three children who are Bank officers and directors. (Continued)

{{6-30-94 p.A-2414}}tions with the Trust did not violate Regulation O and Section 23A, they were imprudent extensions of credit which constituted unsafe or unsound banking practices. See, R.D. at 27–30.

2. Respondent's Exceptions.

   (A) Respondent argued that computation of its capital ratio, for purposes of reporting capital requirements under the terms of paragraph 2 of the cease-and-desist order, should be figured on a quarterly average basis, rather than an end-of-period basis as proposed by FDIC Enforcement Counsel. Respondent excepts to the Recommended Order to Cease and Desist of the ALJ ("Recommended Order") because it does not incorporate this request.
   In the Board's view, each party is about half right. The capital ratio calculation should be made in accordance with FDIC Rules and Regulations concerning capital maintenance, 12 C.F.R. Part 325. The regulations define "total assets," the denominator of the ratio, as a quarterly average. 12 C.F.R. § 325.2(v). However, the numerator used in calculating the ratio is a quarter-end figure. 12 C.F.R. § 325.2(t). The Board has modified the terms of the Recommended Order to reflect more accurately the applicable regulations.
   (B) Respondent also excepts that paragraph 12 of the Recommended Order does not include the language underlined below:
   "In addition, the Bank shall adopt appropriate procedures designed to ensure its future compliance, in a manner consistent with sound banking practices, with all future federal and state laws and regulations."
   Respondent argues that this language is "intended to define the standard by which the directors must ensure future compliance with applicable law and regulations." Resp. Ex. at 2.
   The Board declines to adopt this requested change. The provision as recommended is well-established through use in consent orders and litigated orders by the Board. It is clear and unambiguous in its intent and meaning. There have been no interpretational difficulties with respect to its enforcement. The meaning of Respondent's proposed modification, on the other hand, is both unclear and untested. It inserts a potential defense to future violations of law that may well interfere with appropriate enforcement of the Order.

2. FDIC Enforcement Counsel's Exceptions.

   The Board has made three changes to the Recommended Order requested by FDIC Enforcement Counsel, in each case adopting the language originally proposed by FDIC Enforcement Counsel.
   (A) The Board has included a reference in the Recommended Order to the Bank's practice of an excessive concentration of loans to one borrower or his related interests, because the record contains substantial evidence supporting the existence of that condition. FDIC Ex. 2 at 134.
   (B) The Board has changed the time for calculating Part 325 Tier 1 capital ratios to 30 days rather than 90 days, because it coincides with the time within which the Bank's Reports of Condition and Income should be finalized and filed with the FDIC. See 12 C.F.R. § 303.4.
   (C) The Board has deleted as inappropriate and unnecessary a requirement in the Recommended Order that the Bank and the FDIC mutually agree to an emergency lending plan.

CONCLUSION

   The Board hereby adopts the Recommended Decision with the correction of minor errors, as described above. The Board concludes that the record fully supports issuance of the Recommended Order of the ALJ, with the changes referred to above and certain minor corrections.8

ORDER

   The Board having considered the entire record and the applicable law, finds and concludes that the Bank, as set forth in this


7Continued: Moreover, John Christo, Jr., John Christo, III, and Irene Christo are the directors and officers of Florida Bay Banks, Inc., Tr. at 544, 580. Therefore, John Christo, III, and Irene Christo in concert with their father, John Christo, Jr., control the bank holding company. Hence the Trust is also an "affiliate" of the Bank pursuant to section 23A(b)(1)(C)(i). See, R.D. at 43, 44. To conclude otherwise in the absence of clear evidence is to ignore reality.

8 Page 59, paragraph 2(e), change the references to sections 325.2(m) and 325.2(n), respectively, to 325.2(t) and 325.2(v), respectively.
   Page 65, paragraphs 11(a) and (b), change references to calendar year 1993 to calendar year 1994.

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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 law and regulations:
   Failing to provide adequate supervision over and direction of the Bank by the board of directors of the Bank to prevent unsafe or unsound practices and violations of law and regulations;
   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 aversely classified assets and nonearning assets;
   D. Engaging in hazardous lending and ineffective and lax collection practices, including but not limited to: (i) lending to businesses which are inadequately capitalized; (ii) failing to provide adequate diversification of risk by allowing an excessive concentration of loans to one borrower or his related interests; (iii) failing to establish and/or enforce repayment programs; (iv) extending credit through overdrafts and/or advancing funds against uncollected deposit balances without proper controls to limit exposure to the Bank; and (v) extending credit without adequate financial information and other loan documentation to support the extensions of credit, including but not limited to current financial statements and evidence of insurance for collateral real estate.
   E. Engaging in practices which produce inadequate operating income and excessive loan losses;
   F. 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;
   G. Failing to operate the Bank with adequate internal controls and accounting systems to prevent unsafe and unsound practices, as more fully described on page 6-c of the FDIC's Report of Examination of the Bank as of November 18, 1991; and
   H. Engaging in violations of applicable laws and regulations, as more fully described on pages 6-b through 6-b-2 of the FDIC's Report of Examination of the Bank as of November 18, 1991.
   IT IS FURTHER ORDERED that the Bank and its successors and assigns take affirmative action as follows:
   1. (a) Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include (i) a new chief executive officer with proven ability in managing a bank of comparable size and with comparable asset problems, (ii) new chief operating officer with proven ability in managing the daily operations of a bank of comparable size and operational problems, and (iii) a senior lending officer with proven ability in managing a loan portfolio of comparable size and with an appropriate level of lending, collection and loan supervision experience necessary to supervise the upgrading of a low quality loan portfolio.9 Such management shall be provided with 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) maintain all aspects of the Bank in, or, if necessary, restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity. As 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 proposed 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. § 1831(i), and implementing regulations; must include the names and qualifications of any replacement personnel;


9 Any such officer employed or appointed for the first time after November 18, 1991, shall be considered as "new."

{{6-30-94 p.A-2416}}and must be provided at least thirty (30) days prior to the individual's assuming the new position.
   (b) To facilitate compliance with paragraph 1(a) of this ORDER, the board of directors shall, in no more than thirty (30) days from the effective date of this ORDER, appoint an individual or a committee of individuals who are independent with respect to the Bank to develop, within ninety (90) days from the effective date of this ORDER, a written analysis and assessment of the Bank's management and staffing needs ("Management Plan"), which shall include, at a minimum:

       (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank;
       (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
       (iii) evaluation of each Bank officer and staff member to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and
       (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the board of directors determines are necessary to fill Bank officer or staff member positions consistent with the analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b) (iii) of this ORDER.
   (c) The Management Plan and all subsequent modifications to the Management Plan shall be submitted to the Regional Director for review and comment. Within thirty (30) days from receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall approve the Management Plan 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 Plan and shall implement and follow any modifications to the Management Plan as such modifications may be made from time to time.
   (d) For purposes of this ORDER, an individual who is "independent with respect to the Bank" shall be any individual (i) who is not an officer or director of the Bank or any of its affiliated organizations and who does not own more than five (5) percent of the outstanding shares of the Bank or any of its affiliated organizations, (ii) who is not related by blood, marriage or common financial interest to an officer or director of the Bank or to any stockholder owning more than five (5) percent of the outstanding shares of the Bank or any of its affiliated organizations, and (iii) who is not indebted to the Bank, directly or indirectly (including the indebtedness of any entity in which the individual has a substantial financial interest), in an amount exceeding five (5) percent of the Bank's total equity capital and allowance for loan and lease losses.
   2. (a) Within thirty (30) days after the effective date of this ORDER, and within thirty (30) days after each March 31, June 30, September 30, and December 31 date thereafter while this ORDER remains in effect, the Bank shall calculate its Part 325 Tier 1 capital as a percentage of its total assets (this percentage shall be referred to as the Bank's "capital ratio") for the immediately preceding quarter, in accordance with the FDIC's Rules and Regulations. If such capital ratio is less than six and one-half (6.5) percent, then, within ninety (90) days from the date of such calculation, the Bank shall increase its Part 325 Tier 1 capital by an amount sufficient to raise its capital ratio to not less than six and one-half (6.5) percent as of the end of the nearest preceding quarter.
   (b) For the purposes of this ORDER, the terms "Part 325 Tier 1 capital" and "total assets" shall have the meanings ascribed to them in sections 325.2(t) and 325.2(v), respectively, of the FDIC's Rules and Regulations, 12 C.F.R. §§ 325.2(t) and 325.2(v).
   (c) Any increase in Part 325 Tier 1 capital which may be required by paragraph 2(a) of this 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;
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       (ii) The collection in cash of all or part of the assets other than loans classified "Loss" or "Doubtful" as of November 18, 1991, and charged off in accordance with paragraph 4 of this ORDER;
       (iii) The direct contribution of cash by the directors and 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.
   (d) (i) If all or part of any increase in the Bank's Part 325 Tier 1 capital which may be required under paragraph 2(a) of this ORDER is accomplished by the sale of new securities, the 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 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, 550 17th Street, N.W., Washington, D.C. 20429 for review. All changes requested by the FDIC to be made in such offering materials shall be made prior to their dissemination.
       (ii) In complying with the provisions of paragraph 2(d)(i) of this ORDER, the Bank shall provide to each subscriber and/or purchaser of the Bank's 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 2(c)(ii) of this 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.
   (e) In addition to the requirements of paragraph 2(a) of this ORDER, for as long as this ORDER remains in effect, the Bank shall meet the minimum ratio requirements established for "risk-based capital" by the deadlines set out in Appendix A of Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, which Appendix A is entitled "Statement of Policy on Risk-Based Capital," as such minimum ratio requirements and deadlines may be modified from time to time by amendments to the FDIC's Rules and Regulations.
   3. (a) Within thirty (30) days from the effective date of this ORDER, and concurrently with compliance with the requirements of paragraph 4 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 3(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 review shall include consideration of loans internally classified during the Bank's loan review process, loans adversely classified at FDIC or State of Florida Banking Department examinations of the Bank, and delinquent non-performing loans. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of any recommended changes in the allowance, and the basis for determining the amount of allowance provided.
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       (b) Reports of Condition and Income required to be filed by the Bank prior to the effective date of this ORDER and subsequent to November 18, 1991, shall reflect a provision for the allowance for loan and lease losses necessary to comply with paragraph 3(a) of this ORDER. If necessary to comply with this paragraph 3(b) of the ORDER, the Bank shall file amended Reports of Condition and Income within thirty (30) days from the effective date of this ORDER.
   4. Within thirty (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 the FDIC's Report of Examination of the Bank as of November 18, 1991, which have not been previously collected or charged off, unless otherwise approved in writing by the Regional Director. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph 4 of the ORDER.
       5. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall submit to the Regional Director a written plan of action to reduce each asset which was adversely classified by the FDIC as of November 18, 1991, and which aggregated two hundred thousand dollars ($200, 000) or more as of that date. Such plan of action shall be implemented by the Bank and monitored, and progress reports regarding the implementation of such plan shall be submitted by the Bank to the Regional Director at ninety (90) day intervals concurrently with the other reporting requirements set forth in paragraph 17 of this ORDER.
       (b) As used in this paragraph 5 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.
       6. (a) Effective the date of this ORDER, the Bank shall not knowingly or with good cause to have known 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, prior to the extension of credit, a majority of the Bank's board of directors: (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 5(a) of this ORDER as to such borrower; (iii) determines that the extension of credit is in full compliance with the Bank's loan policy; (iv) determines that all necessary loan documentation is on file, including but not limited to, current financial and cash flow information and satisfactory appraisal, title and lien documents; and (v) approves such advance. A written record of the board of directors' determination and approval of any advance under this paragraph 6(b) of the ORDER shall be maintained in the credit file of each affected borrower as well as in the minutes of the board of directors.
       (c) The requirements of this paragraph 6 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 interests due at the time of such renewal or extension is collected in cash from the borrower.
       7. (a) Within thirty (30) days from the effective date of this ORDER, and in accordance with the Instructions for the Reports of Condition and Income, the Bank shall revise on its books all accrued and unpaid interest on any loan that is ninety (90) days or more delinquent in principal or interest payments and is not both well secured and in the process of collection.
       (b) Effective the date of this ORDER, the Bank shall not: (i) accrue interest on any loan that is, or becomes, ninety (90) days or more delinquent in principal or interest payments unless the loan is both well secured and in the process of collection; (ii) add uncollected interest to the unpaid principal balance of any loan on {{6-30-94 p.A-2419}}which interest is due unless such addition is supported by additional tangible collateral which adequately and completely secures the loan; (iii) extend credit by means of a new note for uncollected interest due on any loan unless such new extension of credit is supported by additional tangible collateral which adequately and completely secures the loan; or (iv) book uncollected interest by any other means in contravention of the Instructions for Reports of Condition and Income.
       (c) For purposes of this paragraph 7 of the ORDER, "well secured" and "in the process of collection" shall have the same meanings as those terms have in the prevailing Instructions for the Reports of Condition and Income.
   8. Within sixty (60) days from the effective date of this ORDER, the Bank shall review and revise, if necessary, its written loan policy to include the following elements:
   (a) The requirement that before advancing any loan the Bank will obtain, analyze, and verify credit information which will be sufficient to identify a source of funds to repay the debt and support the scheduled repayment plan;
   (b) The requirement that all collateral documentation, or evidence of collateral documentation, has been obtained and reviewed before loan proceeds are distributed;
   (c) The requirement for maintenance and review of complete and current credit files on each borrower with loans outstanding;
   (d) Establishment of criteria and guidelines for the acceptance and review of financial statements; and
   (e) Provision for limiting loans to any one borrower or related group of borrowers involving the same collateral or income source to no more than twenty-five (25) percent of the Bank's total equity capital, and establishment of an acceptable system for identifying the Bank's total risk exposure to any one borrower or related group of borrowers involving the same collateral or income source, including direct and indirect funded extensions of credit and unfunded commitments. Thereafter, the Bank and its successors and assigns shall implement and follow the loan policy and shall implement and follow any modifications to the loan policy as such modifications may be made from time to time.
   9. (a) Effective the date of this ORDER, all new loans or lines of credit extended by the Bank (including renewals and extensions of existing loans and lines of credit, but excluding additional advances under existing lines of credit) in an amount of two hundred thousand dollars ($200, 000) or more shall require the prior approval of the Bank's board of directors or of a committee which shall include at least two voting members who are directors of the Bank and who are not Bank officers or employees, and which is designated by the board to review and approve loans ("Loan Committee").
   (b) All loans or lines of credit required by paragraph 9(a) of this ORDER to be submitted to the board of directors or the Loan Committee for review and approval shall be supported by a written summary that provides information sufficient for the board of directors or the Loan Committee to make a prudent decision. Such written information shall include, at a minimum, the following:
       (i) The total amount and status of the borrower's current indebtedness to the Bank and the amount of the new extension of credit proposed;
       (ii) The purpose of the proposed extension of credit;
       (iii) The source of repayment;
       (iv) The method of repayment;
       (v) The interest rate payable by the borrower;
       (vi) The maturity of the debt;
       (vii) A description and valuation of collateral, if secured; and
       (viii) A statement of whether the loan or line of credit complies in all respects with the written loan policy of the Bank, and, if not, a statement of the reasons justifying deviation from the Bank's loan policy.
   10. Subsequent to the effective date of this ORDER, the Bank shall not extend credit to any person or entity through overdrafts or by advancing funds against uncollected deposit balances without adequate controls to limit the Bank's risk exposure. Any such extensions of credit shall comply with all {{6-30-94 p.A-2420}}applicable state and Federal laws, rules and regulations and with the Bank's written loan policy requirements for both unsecured lending and extensions of credit through overdrafts.
   11. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall prepare a realistic and comprehensive budget and earnings forecast for calendar year 1994 and shall submit this budget and earnings forecast to the Regional Director for review and comment.
   (b) 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 as of January 1 of each year subsequent to 1994 and shall submit them to the Regional Director for review and comment no later than January 31 of the budget year.
   (c) In preparing the budget and earnings forecasts required by this paragraph 11 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.
   (d) In preparing the budget and earnings forecasts, particular emphasis shall be given to limiting overhead expenses.
   (e) 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 17 of this ORDER.
   12. Within thirty (30) days from the effective date of this ORDER, the Bank shall take all necessary steps, consistent with sound banking practices, to eliminate or correct all alleged violations of law and regulations described on pages 6-b through 6-b-2 of the FDIC's Report of Examination of the Bank as of November 18, 1991. In addition, the Bank shall adopt appropriate procedures designed to ensure its future compliance with all applicable Federal and state laws and regulations.
   13. Within thirty (30 days from the effective date of this ORDER, the Bank shall develop a written plan and strategy for achieving within a reasonable time frame, and thereafter maintaining, at least the minimum liquidity ratio required in the Bank's Assets/Liability Management Policy. Thereafter, the Bank, its directors, officers and employees shall follow the written liquidity ratio plan and strategy and its Assets/ Liability Management Policy, and any subsequent modifications thereto, and shall report its liquidity position to the Regional Director concurrently with the other reporting requirements specified in paragraph 17 of this ORDER.
   14. Within thirty (30) days from the effective date of this ORDER, the Bank shall correct the internal routine and control deficiencies described on page 6-c of the FDIC's Report of Examination of the Bank as of November 18, 1991.
   15. Effective the date of this ORDER, the Bank shall not pay any cash or property dividends without the prior written consent of the Regional Director.
   16. 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, 550 17th Street, N.W., Washington, D.C. 20429, for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   17. Within ninety (90) days from the effective date of this ORDER and within thirty (30) days following the end of each calendar quarter 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 of such actions. 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 {{6-30-94 p.A-2421}}written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the appropriate board meeting.
   18. The provisions of this ORDER shall become effective thirty (30) 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 5th day of April, 1994.
/s/ Robert E. Feldman
Acting Executive Secretary

___________________________________

RECOMMENDED DECISION

In the Matter of
Bay Bank & Trust Co.
Panama City, Florida
(Insured State Nonmember Bank)
Docket No. FDIC-92-313b
Walter J. Alprin, Administrative Law Judge:

I. PROCEDURAL HISTORY

   On November 13, 1992, the Federal Deposit Insurance Corporation ("FDIC") initiated a Cease and Desist action against Respondent Bay Bank and Trust Co. ("Respondent" or "Bank") pursuant to its authority under Section 8(b) of the Federal Insurance Act, 12 U.S.C. § 1818(b)(1). FDIC alleges that Bank engaged in the following unsafe or unsound practices: operating with inadequate allowance for loan or lease losses (ALLL); having an excessive amount of adversely classified loans; renewing an extension of credit to the JCJ Irrevocable Trust ("Trust") without additional collateral or cash or current financial information; engaging in hazardous lending and lax collection practices; and having poor management and inadequate supervision. The Notice of Charges ("Notice") also alleges that Respondent violated 22(h)(3) of the Federal Reserve Act, 12 U.S.C. § 375b(3), and 215.4(a) of Regulation O of Board of Governors of the Federal reserve System, 12 C.F.R. Part 215 as well as section 23A of the Federal Reserve Act, 12 U.S.C. § 371c. The alleged violations of law relate to transactions involving the Trust.
   The FDIC initiated this action following a series of examinations of the Bank, the last of which was on November 18, 1991, in which the Bank received a composite rating of a "4".1 A hearing was held before the undersigned in Panama City, Florida on February 16 – 18 and June 28 – 29, 1993.2 Briefs and Reply Briefs were timely filed, and unopposed motions to correct the transcript are hereby granted.
   For the reasons hereinafter specified, this decision recommends the imposition of an order to cease and desist generally, but not completely, as suggested by agency Enforcement counsel. Respondent's proposed modifications Nos. 2, 4, 7 and 10 of Appendix A to its Reply Brief are, in whole or in part, recommended for acceptance as included in the recommended Order. The provisions of the Cease and Desist Order proposed by FDIC Enforcement counsel, at paragraph "1" and relating to retention or change of chief executive and operating officers, has been


1 Institutions rated "4" have an immoderate volume of serious weaknesses or a combination of other conditions that are unsatisfactory. (FDIC Ex. 2/15). The composite rating is the combined rating of the CAMEL system. CAMEL is the acronym used for capital, assets, management, equity and liquidity. Institutions are rated on each area and also given a composite number from 1 through 5, 1 being the highest rating.
Exhibits are identified by the designation of the offeror, and number. Transcript pages are identified as "TR." followed by the page number. Joint Stipulations of Fact are identified by "JS" followed by a number. Posthearing briefs are identified by "R's Posthearing Br." and "FDIC's Posthearing Br." Responses to the posthearing briefs are identified as follows: "R's Reply Br." and "FDIC's Reply Br."

2 Prior to hearing, the parties had agreed to a protective order in an attempt to preserve the confidentiality of bank customers and non-parties to this action. During hearing, enforcement counsel argued that the protective order was being applied too broadly. Respondent, disagreeing with agency counsel, requested that the terms of the protective order be modified or limited to prohibit the public from attending the hearing. The undersigned ruled in favor of agency Enforcement counsel, but adjourned the hearing to permit Respondent to seek intermediate review. FDIC denied bank's request to modify. See In the Matter of Bay Bank & Trust Co., Panama City, Florida, FDIC-92-313v, 2 P-H FDIC Enf. Dec. ¶8027 (May 13, 1993). After FDIC's denial of respondent's request the hearing then resumed.

{{6-30-94 p.A-2422}}clarified to recommend that any such officer employed after November 18, 1991, shall be a "new" officer.

II. STATEMENT OF THE CASE

   Most of the facts in this case are not in dispute. The Band has significantly deteriorated financially during the course of the last three state and FDIC bank examinations, and the dispute arises as to the cause of Respondent's decline. Enforcement counsel argue that Respondent's infirm position is due to existing and past unsafe or unsound practices as well as to violations of the federal banking laws that regulate loans to insiders and affiliates. Enforcement counsel seek to have Respondent's unsafe or unsound practices discontinued to prevent future harm to the institution and the Insurance Fund. Respondent argues that its decline is a result of a deterioration in the local and general economy. The Bank maintains it has made significant improvement since the last examination by the FDIC and that the imposition of a Cease and Desist order, particularly in the form demanded by Enforcement counsel, is unwarranted.

III. FINDINGS OF FACT

A. GENERAL FINDINGS

   1. The Bank, incorporated in the State of Florida and with its principal place of business at Panama City, Florida, 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 ¶s 1, 2 and 3). At all times pertinent to this proceeding Irene L. Christo, James Phillip Christo, John Christo, Jr., John Christo, III, and others who were not members of the Christo family, served as the Bank'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). John Christo, Jr. served as the Bank's chairman of the board of directors and chief executive officer, while John Christo, III serves as the Bank's President and was responsible for the day-to-day management of the Bank. (JS ¶s 1, 2, 3, 7, 8, 9, and 10).
   2. At all times pertinent to this proceeding 100 percent of the authorized and outstanding shares of the Bank's capital stock was owned and controlled by Florida Bay Banks, Inc., Panama City, Florida, a bank holding company, 96% of the preferred stock of which was owned and/or controlled by John Christo, Jr., and 42,436 shares, comprising over 65 percent of the common stock, was owned and/or controlled by the JCJ Irrevocable Trust. (JS ¶s 11, 12, and 13).
   3. The FDIC conducted examinations of the Bank as of the close of business on March 5, 1990, and November 18, 1991, and prepared written Reports of Examination, copies of which were furnished to the Bank. (JS ¶ 14). The Office of Comptroller, Department of Banking and Finance, State of Florida, conducted examinations of the Bank as of the close of business on March 31, 1991, and July 6, 1992, and prepared written Reports of Examination, copies of which were furnished to the Bank. (JS ¶15; FDIC Ex. 23).
   4. On September 17, 1991, the Bank entered into a Written Agreement with the State of Florida Department of Banking and Finance, pursuant to the terms of which the Bank is, and was, precluded from declaring and paying dividends on its capital common stock without the express written notification to and permission of the Department. (JS ¶40; FDIC Ex. 11). On and after September 29, 1991, the State of Florida Department of Banking and Finance has not authorized the Bank to pay dividends on its capital common stock. (JS ¶41).
   5. Acting within the scope of its authority pursuant to section 8(b) of the Act, 12 U.S.C. § 1818(b), on November 13, 1992, the FDIC issued a Notice of Charges and of Hearing against the Bank in this matter. (JS ¶§ 16 and 17). The FDIC has jurisdiction over the Bank, the Bank'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 ¶18).
B. CAPITAL AND ASSET STRUCTURE

       6. As of October 31, 1991:
       (a) The Bank's Tier 1 capital equaled $9,684,000;
       (b) The Bank's adjusted Tier 1 capital equaled $9,440,000;
       (c) The Bank's Tier 2 capital equaled $1,804,000;
       (d) The Bank's total capital equaled $11, 488,000;
       (e) The Bank's total assets consisted primarily of loans, cash, securities, fixed assets, investment in unconsolidated subsidiaries, {{6-30-94 p.A-2423}}and Other Real Estate Owned ("OREO");
       (f) The Bank's adjusted Part 325 Total Assets equaled $167,388,000;
       (g) The Bank's gross risk-weighted assets equaled $120,286,000;
       (h) The Bank's total deposits equaled $147,569,000;
       (i) The Bank's gross loans equaled $110, 960,000;
       (j) The Bank's total loans, i.e., gross loans less unearned income in the amount of $868,000, equaled $110,092,000;
       (k) The Bank's net loans, i.e., gross loans less unearned income and less the allowance for loan and lease losses, equaled $107,550,000; and
       (l) The Bank's allowance for loan and lease losses equaled $2,542,000. (JS ¶ 19; FDIC Ex. 2/16, 17, 18, 139).
       17. As of October 31, 1991:
       (a) The Bank's Tier 1 capital in the amount of $9,684,000 consisted of common shareholders' equity, surplus and undivided profits in the cumulative amount of $11,891,000 less $2,140,000 in asset classified "Loss" and less $67,000 in the unbooked examination fee assessed by the Office of the Comptroller, Department of Banking and Finance, State of Florida;
       (b) The Bank's adjusted Tier 1 capital in the amount of $9,440,000 consisted of the Bank's Tier 1 capital less $244,000 in assets adversely classified "Doubtful;"
       (c) The Bank's Tier 2 capital in the amount of $1,804,000 consisted of the allowed amount of the Bank's allowance for loan and lease losses; and
       (d) The Bank's total capital in the amount of $11,488,000 equaled the sum of the Bank's Tier 1 capital and Tier 2 capital. (FDIC Ex. 2/18).
       8. As of October 31, 1991:
       (a) The Bank's Part 325 Total Assets in the amount of $167,632,000 consisted of its Average Assets from its latest Report of Condition and Income in the amount of $169,772,000 less $2,140,000 in assets adversely classified "Loss;" and
       (b) The Bank's adjusted Part 325 Total Assets in the amount of $167,338,000 consisted of the Bank's Party 325 Total Assets less $244,000 in assets adversely classified "Doubtful." (FDIC Ex. 2/18).
       9. As of October 31, 1991:
       (a) The Bank's risk-weighted assets, before deductions, equaled $122,426,000;
       (b) The Bank's gross risk-weighted assets in the amount of $120,286,000 equaled the Bank's risk-weighted assets less $2, 140,000 in assets adversely classified "Loss;" and
       (c) The Bank's total risk-weighted assets in the amount of $119,548,000 equaled the Bank's gross risk-weighted assets less the disallowed portion of the Bank's allowance for loan and lease losses in the amount of $738,000. (FDIC Ex. 2/18).
       10. As of October 31, 1991:
       (a) The Bank's Tier 1 capital as a percent of Part 325 Total Assets equaled 5.78 percent; and
       (b) The Bank's Tier 1 capital as a percent of total risk-weighted assets equaled 8.10 percent. (FDIC Ex. 2/19).
   11. The Bank's Tier 1 capital as a percent of Part 325 Total Assets declined from 7.49 percent as of March 31, 1991, to 5.78 percent as of October 31, 1991. (FDIC Ex. 2/19).
   C. ADVERSELY CLASSIFIED ASSETS    12. As of November 15, 1991:
   (a) The Bank's total adversely classified assets consisting of loans and leases, securities, OREO and Other Assets equaled $20,373,000;
   (b) The Bank's adversely classified Other Assets consisting of prepaid expenses, receivables, income earned but not collected, investments in unconsolidated subsidiaries and repossessions equaled $324,000;
   (c) The Bank's total adversely classified assets equaled 12.51 percent of the Bank's total assets;
   (d) The Bank's adversely classified items, consisting of adversely classified assets and adversely classified contingent liabilities, less the allowance for loan and lease losses, equaled 184.45 percent of the Bank's Tier 1 capital; and
   (e) The Bank's total adversely classified items equaled 138.79 percent of total equity capital and reserves. (FDIC Ex. 2/16, 19).
   13. As of November 15, 1991:
   (a) The Bank's adversely classified loans and leases, which comprised the largest {{6-30-94 p.A-2424}}portion of the Bank's total adversely classified assets, equaled $13,657,000, consisting of $11,457,000 adversely classified "Substandard," $458,000 adversely classified "Doubtful" and $1,742,000 adversely classified "Loss;" and
   (b) The Bank's adversely classified loans and leases equaled 12.41 percent of the Bank's total loans and leases or 141.03 percent of the Bank's Tier 1 capital or 94.62 percent of total equity capital and reserves. (FDIC Ex. 2/16, 18).
   14. As of November 15, 1991:
   (a) The Bank's adversely classified OREO equaled $6,032,000, consisting of $5,751,000 adversely classified "Substandard," $29,000 adversely classified "Doubtful" and $252,000 adversely classified "Loss;" and
   (b) The Bank's adversely classified OREO equaled 77.94 percent of the Bank's total ORE. (FDIC Ex. 2/16; (JS ¶20).
   15. The level of the Bank's total adversely classified assets and contingent liabilities has increased in dollar volume, as a percent of total equity capital and reserves and as a percent of total assets as follows:
       (a) The dollar volume of the Bank's adversely classified assets and contingent liabilities has increased from $13,672,000 as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, to $20,404,000 as of November 15, 1991;
       (b) The percent of the Bank's adversely classified items (consisting of assets and contingent liabilities) to total equity capital and reserves has increased from 96.27 percent as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, to 138.79 percent as of November 15, 1991; and
       (c) The percent of the Bank's adversely classified assets to total assets has increased from 9.04 percent as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, to 12.51 percent as of November 15, 1991. (FDIC Ex. 2/16, 19).
   16. The level of the Bank's adversely classified loans, which comprised the largest portion of the Bank'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 the Bank's adversely classified loans has increased from $7,309,000 as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, to $13,657,000 as of November 15, 1991; and
       (b) The percent of the Bank's adversely classified loans to total loans has increased from 7.04 percent as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, to 12.41 percent as of November 15, 1991. (FDIC Exs. 2/16; 5/1).
   17. The total of the Bank's adversely classified loans in the amount of $13,657,000 as of November 15, 1991, included $2,826,000 in loans not previously adversely classified. (FDIC Ex. 2/137).

    D. OVERDUE AND NONACCRUAL LOANS

       18. As of November 15, 1991:    (a) The Bank had 206 loans in the aggregate amount of $9,340,000 which were overdue 30 days or more;
       (b) Of the Bank's overdue loans, 93 loans in the aggregate amount of $3,733, 000 were overdue 30–89 days and 113 loans in the aggregate amount of $5,607, 000 were overdue 90 days or more; and
       (c) The Bank's overdue loans were 8.42 percent of the Bank's gross loans. (JS ¶21; FDIC Exs. 2/139; 5/2).

   19. As of November 15, 1991, the Bank had 54 loans in the aggregate amount of $4,640,000 or 4.18 percent of gross loans which were in a nonaccrual status. (JS ¶22; FDIC Exs. 2/139; 5.2).

E. INCREASE IN OVERHEAD EXPENSES

   20. The Bank's total overhead expenses in dollar volume and as a percent of Average Assets have increased from $8,744,000 or 5.45 percent as of December 31, 1990, to $10,669,000 or 6.28 percent as of October 31, 1991. (JS ¶24).

    F. INADEQUATE ALLOWANCE FOR LOAN AND LEASE LOSSES

       21. As of November 15, 1991:    (a) The Bank's only reserve account was its allowance for loan and lease losses which equaled $2,542,000;
       (b) The Bank's loans adversely classified "Loss" in the amount of $1,742,000 and 50 percent of the Bank's loans adversely classified "Doubtful" in the amount of $229,000 when aggregated with {{6-30-94 p.A-2425}}10 percent of loans adversely classified "Substandard" in the amount of $1,145, 700 equaled $3,116,700 or 122.61 percent of the Bank's total allowance for loan and lease losses; and
       (c) The Bank's allowance for loan and lease losses in the amount of $2,542,000 equaled only 2.31 percent of the Bank's total loans. (JS ¶25; FDIC Ex. 2/16).

   22. As of November 18, 1991, the Bank's allowance for loan and lease losses was deficient by at least the amount of $1,399,000. (FDIC Ex. 2/23; TR. 120).

G. DECLINE IN EARNINGS

   23. Pursuant to the Bank's December 31, 1991 Uniform Bank Performance Report prepared by the Federal Financial Institutions Examination Council, the Bank's earnings declined during the years 1990 and 1991. The Bank's net income after tax decreased from $1,345,000 in 1990 to negative $976, 000 in 1991, or from 0.85 percent of Average Assets in 1990 to negative 0.95 percent of Average Assets as of October 31, 1991. (JS ¶26).
   24. Pursuant to the Bank's December 31, 1991, Uniform Bank Performance Report, the Bank's earning assets as a percent of Average Assets equaled 83.36 percent as compared to 92.46 percent for the Bank's peer group. (JS ¶29).

H. INCREASE IN THE LEVEL OF OREO AND IN THE LEVEL OF ADVERSELY CLASSIFIED OREO

   25. OREO is real estate held by the Bank which formerly secured a loan to a borrower who defaulted in the repayment of the obligation. (JS ¶42; TR. 111).
   26. The level of the Bank's OREO has increased in dollar volume and as a percent of total assets as follows:

       (a) The dollar volume of the Bank's OREO has increased from $4,935,000 as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, to $7,739,000 as of October 31, 1991; and
       (b) The percent of the Bank's OREO to total assets has increased from 3.27 percent as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, to 4.75 percent as of October 31, 1991. (JS ¶27).
   27. The level of the Bank's adversely classified OREO has increased in dollar volume, as a percent of total equity capital and reserves and as a percent of total OREO as follows:
       (a) The dollar volume of the Bank's adversely classified OREO has increased from $4,005,000 as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, to $6,032,000 as of October 31, 1991;
       (b) The percent of the Bank's adversely classified OREO to total OREO equaled 81.16 percent as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, and equaled 77.94 percent as of November 18, 1991; and
       (c) The percent of the Bank's adversely classified OREO to total equity capital and reserves increased from 28.20 percent as shown in the FDIC Report of Examination of the Bank as of March 5, 1990, to 52.51 percent as of October 31, 1991. (FDIC Ex. 5/1).

    I. HAZARDOUS LENDING AND LAX COLLECTION PRACTICES

       28. (a) The Bank extended credit to borrowers with insufficient repayment ability;
       (b) The Bank extended credit without establishing and/or enforcing an adequate and realistic repayment plan; and
       (c) The Bank extended credit based on stale financial information and insufficient documentation. (FDIC Ex. 2; 15/1, 3; TR. 109–110).

J. MANAGEMENT

   29. During the period between the FDIC examination of the Bank as of March 5, 1990, and the FDIC examination of the Bank as of November 18, 1991, the efforts of the Bank's management to prevent further deterioration in the Bank's loans not previously adversely classified proved unsuccessful. (TR. 122–129; FDIC Ex. 2).

K. UNIFORM COMPOSITE RATING

   30. As of November 18, 1991, the Bank'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 {{6-30-94 p.A-2426}}which was accorded a numerical rating on a scale of 1 to 5 in ascending order of supervisory concern, a composite rating of 4 was assigned to the Bank. (TR. 182–184; FDIC Ex. 2/15).

L. TRANSACTION WITH JCJ IRREVOCABLE TRUST

   31. The Trust was created on February 18, 1980, by A. I. Christo and John Christo, Jr. under the laws of the State of Florida for the benefit of Irene L. Christo, James Phillip Christo and John Christo, III. (JS ¶30; TR. 629). At all times pertinent to this proceeding, the income-producing corpus of the Trust consisted, in principal part, of shares of capital common stock of Florida Bay Banks, Inc., Panama City, Florida, a bank holding company, and of Bay Savings Bank, West Palm Beach, Florida. (JS ¶31). John Christo III was the sole voting trustee of the Trust. (TR. 650–652; FDIC Ex. 18). On February 25, 1991, pursuant to authorization by its board of directors, the Bank issued an unsecured Letter of Credit (No. 509) ("the Letter of Credit") in the amount of $425,000 on behalf of the Trust to SouthTrust Bank of Alabama, N.A., Birmingham, Alabama ("SouthTrust"). (JS ¶32). The terms of the Letter of Credit permitted SouthTrust to require payment of the sum of $425,000 from the Bank upon notification to the Bank that the amount due and payable on an extension of credit by SouthTrust to the Trust was 30 days or more past due. (JS ¶33).
   32. On June 3, 1991, SouthTrust made two extensions of credit to the Trust in the amount of $850,000 (Trustee Note G) and $425,000 (Trustee Note H). (JS ¶34). On or about September 23, 1991, SouthTrust advised the Bank that the Trust was 30 days or more past due in the repayment of Trustee Note H in the amount of $433,429.17 and, as a consequence, SouthTrust gave notice of demand for payment under Letter of Credit issued by the Bank in favor of SouthTrust. (JS ¶35). On or about October 2, 1991, the Bank paid SouthTrust the sum of $425,000 under the Letter of Credit. (JS ¶36). On or about October 2, 1991, the Bank established an unsecured extension of credit for the Trust evidenced by a promissory note (No. 2701444850) in the amount of $425,000. (JS ¶37).
   33. On September 6, 1991, the Director of the Office of Thrift Supervision declared Bay Savings Bank, West Palm Beach, Florida, to be insolvent and placed the insolvent institution in conservatorship under the direction and control of the Resolution Trust Corporation. (TR. 94). On and after September 6, 1991, Bay Savings Bank, West Palm Beach, Florida, has not declared and/or paid any dividends to holders of capital common stock. (TR. 94–95).

M. WITNESS TESTIMONY3

   34. FDIC Witnesses:
   At the evidentiary hearing, the FDIC offered expert testimony through FDIC officials regarding whether the Bank had engaged in unsafe or unsound practices and violations of Federal banking laws and whether the Bank was in an unsafe or unsound condition as a result of such practices, conditions and violations. Each of the FDIC officials was qualified as an expert witness to offer opinion testimony.
   The first expert witness was FDIC Examiner John E. Olsen (TR. 12–195, 292–294) who was the Examiner-in-Charge of the FDIC's examination of the Bank as of November 18, 1991. As a result of his examination, Mr. Olsen concluded that, in his expert opinion, the Bank had engaged in actions and practices which were contrary to generally accepted standards of prudent bank operation, the possible consequence of which, if continued, would be abnormal risk of loss or damage to the Bank and, as such, the Bank had engaged in unsafe or unsound practices and violations of applicable Federal banking laws. (TR. 176–182). Mr. Olsen further testified that, in his expert opinion, the Bank had engaged in actions and practices which were contrary to generally accepted standards of prudent banking practice, and that an Order to Cease and Desist was required. (TR. 184–195).
   FDIC's Assistant Regional Director James A. Shumaker of the Atlanta Regional Office, Division of Supervision, also testified. (TR. 299–328, 444–450). In his testimony, Mr. Shumaker stated that after his review and analysis of the pertinent data concerning the Bank's financial condition, he determined that the Bank was in an unsafe and unsound condition. (TR 309–315). As a consequence, Mr. Shumaker concluded that a formal corrective program, in the form of an Order to Cease and Desist as recommended in FDIC


3 This overview of testimony is not intended to be exhaustive or include each witness presented at hearing.

{{6-30-94 p.A-2427}}Ex. 10, was required to return the Bank to a safe and sound condition. (TR. 315–328).
   Florida state bank Examiner and current Chief of the Bureau of Financial Institutions, Linda Roberston Townsend,4 also testified on behalf of the FDIC. (TR. 461). She examined Respondent during the March, 31, 1991 state examination and found the Bank to have an excessive amount of classified assets, grossly inadequate loan loss reserve, and overstated earnings, and that unsafe or unsound practices existed. (TR. 464).
35. Respondent's Witnesses:
   Respondent's witnesses generally testified as to the effect of an ailing economy on the Bank, the Bank's improved condition, and the corrective measures already taken. Franklin L. Wood, Sr. acting President and CEO of the Bank, testified that an ailing economy affects the Bank's earnings and general position. (TR. 673, 694).
   Charles Parker testified as to the Bank's diligent efforts in reducing nonperforming loans through a tracking system. (TR. 771–773). Christo, III, also testified about the improved condition of the Bank. (TR. 730–731). The reductions in total classified assets claimed, however, were confirmed by neither the FDIC nor the Florida Reports of Examination. (TR 794).
   The July 1992 Florida state examination report paints a far less impressive picture of Bank's improvements than the testimony given on behalf of Respondent. (TR. 795; FDIC Ex. 23). Although the report does acknowledge a slight improvement in the condition of the Bank, the state Examiner found that adversely classified assets, condition of Bank, OREO, and income earned were still inadequate. (FDIC 231-a).
   Edwin Burr, currently a bank consultant and formerly employed with FDIC for 31 years testified that though the Bank was not as yet in substantial compliance, it was making a bona fide effort to comply with the requirements set forth in the agreement it had entered into with the Florida authorities. (TR. 841). Mr. Burr admitted that his review of the FDIC's November 18, 1991 examination report, revealed that the Bank had significant operational and management problems. (TR. 842–846).

IV. DISCUSSION

A. GENERAL ISSUES PRESENTED

   12 U.S.C. § 1818(b)(1) provides in pertinent part that the FDIC may issue a cease and desist order if an institution is engaged in unsafe or unsound banking practices, or has violated a law, rule or regulation. If it is found that Respondent was in noncompliance with the requirements of the statute, it must also be determined whether the conduct alleged justifies the affirmative action sought in Enforcement counsel's proposed order.

B. "UNSAFE OR UNSOUND" PRACTICES

   The phrase "unsafe or unsound practice" is not defined in section 8(b) of the Act, 12 U.S.C. § 1818(b). The statute also does not specify practices which are deemed to be unsafe or unsound. However, the phrase has been commonly understood to mean the following:
...[T]he 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.5
   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 agency was arbitrary or capricious or otherwise unsupported by substantial evi-


4 Ms. Townsend is named individually in a civil lawsuit brought by the Bank. Tr. 479–480.


5 Financial Institutions Supervisory Act of 1966: Hearings on S. 3158 Before the House Committee on Banking and currency, 89th Congress., 2nd Sess., at 49–50 (1966), also noting, that "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." See, also, First National Bank of Eden v. Department of the Treasury, 568 F.2d 610, 611 (8th Cir. 1978), that the "Comptroller suggests that these terms encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder."
{{6-30-94 p.A-2428}}dence,6 and have held that the agency's discretionary authority to define and eliminate "unsafe or unsound" practices is to be "liberally construed."7
   The Notice charges Respondent with the following unsafe or unsound practices: (1) operating with poor management; (2) having hazardous lending and lax collection practices; (3) operating with an excessive amount of adversely classified loans; (4) having an excessive amount of other real estate owned; (5) failing to have adequate Allowance for Loan and Lease Losses; and (6) operating with unsatisfactory earnings. Each of these allegations will be reviewed in turn to determine whether the Bank engaged in unsafe or unsound practices.

1. Ineffective Management

   FDIC alleges that the directors and officers of Bay Bank have performed their jobs inadequately and have therefore adversely affected the financial well being of the institution. The board of directors of an institution is responsible for formulating bank policies and is responsible for formulating an appropriate internal control system and adequate auditing program. (TR. 123, FDIC Ex. 2/11). Executive officers are responsible for the implementation of those policies. (TR. 123). In this instance, many of the bank officials are wearing more than one hat.
   The Bank is a family run institution. The Christo family holds many of the executive officer and board of directors positions, though there are also "outside" directors. John Christo, Jr. ("Christo, Jr.") is Chairman of the Board and Chief Executive Officer. He is the principal management figure in Respondent bank and the controlling owner of the parent holding company, Florida Bay Banks, Inc. (FDIC Ex.2/94). His son, John Christo, III, ("Christo, III") is a director and president of Bay Bank and is the other major decision maker and formulator of bank policy. (FDIC Ex.2/94). Christo, Jr.'s other children, daughter Irene L. Christo and son James Phillip Christo, are each both directors and vice presidents.
   FDIC Examiner Olsen testified that an institution's overall asset quality, level of capital, and earnings and liquidity positions are tests to evaluate the effectiveness of management. (TR. 124). The Examiner attributed the bank's poor health in part to management's failure to perform an adequate credit analysis, and in part to loans granted on a speculative basis. (TR. 87). The Examiner further found incidents of overdrafts causing a loss for the Bank. Several large overdrafts delinquent 48 days or more were classified loss. (FDIC Ex. 2/28, 122–123).
   The Examiner also found violations of the Bank's own explicit policies. A written loan policy, adopted by the board of directors on March 19, 1991, requires current financial statements before any new extensions of credit or loan renewals are made. (FDIC Ex. 2/28. TR. 106). A financial statement is deemed current pursuant to the loan policy if a personal statement is within 14 months from the date of the last statement and a business statement is within 16 months from the date of the last statement. By way of example, Bank extended credit to the Trust (FDIC Ex. 2/29) and Borrower No. 18 (FDIC Ex. 2/107) based on stale financial statements, violating bank policy.
   The Examiner also found the Bank's policies to be deficient. The bank's written loan policy fails to impose a limitation on the maximum volume of loans in relation to total assets. (FDIC Ex. 2/28). The Bank's loan policy contains a section called Credit Risk Grades. Loans are assigned a number according to grade definition of credit quality, (FDIC Ex. 2/28), which should be included on the Bank's internal "watch list" of problem loans.
   The Examiner found an excessive amount of adversely classified loans, attributed to inadequate supervision. The Examiner found that the adversely classified loans increased due to management's ineffectual monitoring of the loan portfolio and that the increase was indicative of poor lending practices and unsatisfactory collection practices.9 (TR. 96).
   2. Hazardous Lending and Lax Collection
   The Bank is charged with hazardous lending and lax collection practices, alleged un-


6 First National Bank of Eden v. Department of the Treasury, 568 F.2d 610 (8th Cir. 1978); In re Franklin National Bank Securities Litigation, 478 F. Supp. 210 (D.C. N.Y. 1979).

7 Independent Bankers Association of America v. Heimann, 613 F.2d 1164, 1169 (D.C. Cir. 1979).

8 To preserve the confidential dealings of the Bank and its customers, the names of criticized lines of credit are withheld unless already mentioned in the Notice of Charges, a public document.

9 The Bank formed a compliance committee in August 1991 with the help of regulators to correct areas criticized. (TR. 757). However, management's efforts have not significantly improved Bank.
{{6-30-94 p.A-2429}}
   safe or unsound practices contributing considerably to the financial deterioration of the institution. Specifically, the Bank is charged with having an excessive amount of past due and nonaccrual loans.
   A loan is considered past due when it is 30 days delinquent. (TR. 102). Past due loans are divided up into two groups, being loans 30 to 89 days delinquent, and loans more than 90 days delinquent. A loan placed in nonaccrual status means that collection has become uncertain and is insufficiently collateralized so that interest has stopped accruing on that loan. (TR. 102).
   Bank Examiner Olsen testified that the November, 1991, examination showed that both past due loans and nonaccrual loans were excessive, and attributed these findings to lax collection practices and inadequate supervision. (TR. 102–104). In comparison to the March, 1990, examination, the November, 1991, examination revealed that while loans 30 to 89 days past due decreased from 130 loans totalling $4,800,000 to 93 loans totalling $3,733,000, those loans delinquent for more than 90 days had increased from 86 loans totalling $4,412,000 to 113 loans totalling $5,607,000.
   Examiner Olsen testified that the Bank extended credit to borrowers who lack sufficient repayment ability, extended credit without establishing a realistic repayment plan or without adequately monitoring debt, and renewed loans with nominal or no principal reduction. (TR. 109–110). A few specific instances are reviewed below.

i. JCJ Irrevocable Trust

   The Trust was established on February 18, 1980, for the benefit of John Christo III, James Phillip Christo, and Irene Christo. (FDIC Ex. 2/105. JS 30). The Trust primarily consists of shares of capital common stock of the holding company owning Respondent Bank, of its holding company (Florida Bay Banks, Inc.), and shares of Bay Savings Bank, now in receivership. (FDIC Ex. 2/105). All three beneficiaries are directors and officers of Bank and Irene Christo and Christo, III are directors of Florida Bay Banks, Inc.
   With Board approval,10 on February 25, 1991, the Bank issued an unsecured irrevocable letter of credit to SouthTrust Bank in the amount of $425,000 on behalf of Trust. (JS 32). The money was advanced to SouthTrust Bank to extinguish a delinquent debt of Christo, III, who signed the note. (FDIC Ex. 2/105). After SouthTrust demanded payment upon the Trust's default, the Bank paid it $425,000 under the Letter of Credit. This extension of credit was unsecured.
   The Letter of Credit to SouthTrust on behalf of the Trust was issued in 1986 for a three year period, renewable year by year thereafter. (TR. 634). SouthTrust Bank required that the letter of credit be in place for as long as its credit to the Trust was outstanding. If the Bank did not renew the credit each year with a new letter, SouthTrust would demand payment prior to the maturity of the then-current Letter. Therefore, Respondent argues, the Bank in effect was required to renew the letter of credit each year because it could never avoid paying the debt. (R's Posthearing Br. 11–12). This argument is specious at best.
   The decision to make, and to renew the Letter of Credit was for the benefit of the Trust, all beneficiaries of which are also directors and who participated in approving the transactions for their own, personal benefit and actually to the detriment of the Bank. The transaction was not in the best interest of Respondent Bank and ultimately resulted in a $425,000 loss to Bank. The Bank was not forced to renew the Letter of Credit each year but instead did so for the benefit of the Trust's individual beneficiaries.
   The Bank made an extension of credit to the Trust at a time when the Trust had insufficient documented sources of income to service the debt.11 The Trust's major source of income was the dividends derived from the shares of Florida Bay Banks, Inc. In turn, the major income producing asset of Florida


10 The three directors, Christo, III, Irene Christo, and Phillip Christo, who are also beneficiaries of the trust, voted to have the letter of credit extended on behalf of the trust. (TR. 634; FDIC Ex. 8/15).

11 John Christo, III testified that although the Trust's only income producing asset was stock from the bank holding company, the trust could have obtained income by selling other assets. TR. 639. However, there was no current documentation of other actual or potential income producing assets. (TR. 650). The only sale possible would have been the majority stock which the Trust held in the operating banks, which either would have resulted in a loss of majority ownership, or resulted in little income since minority interests are sold at appreciably less than book value.
{{6-30-94 p.A-2430}}Bay Banks was dividends paid by Respondent Bank to the holding company.12 (TR. 167). However, Respondent Bank was restricted in paying dividends by a written agreement entered into with the State of Florida Department of Banking and Finance effective September 29, 1991.13 As a result, the bank holding company had no real source of income to pay dividends on its stock, which in turn meant that the Trust also had no income to service or retire its debt. (TR. 168).
   The loan to the Trust was made with insufficient documentation. Examiner Olsen, the Examiner-in-charge at the examination of the Bank as of November 18, 1991, testified that the Bank's loan policy requires production of business financial statements including a statement of income. (TR. 163). The Board of Directors' approval of the letter of credit to SouthTrust on behalf of the Trust in February 1991 was made without a statement of income of the Trust. (TR. 163). There was also no documentation of the approval of the interest rate in the Board minutes. (TR. 166). Further, there was no collateral pledged to secure the letter of credit to SouthTrust in February 1991 nor was there any collateral to secure the promissory note made on October 1991. (TR. 169). The unsecured debt was classified as a loss. (FDIC Ex. 2/105).
   The Bank's loan to the Trust was inherently deficient. The Christo directors and officers must have known that the borrower was inadequately capitalized and therefore posed a greater than normal risk of nonpayment. Internal bank policies were not followed as the loan file contained insufficient documentation, inadequate financial information, and no repayment. The Bank's transactions with the Trust constituted unsafe and unsound practices.

ii. Borrower No. 1

   The Bank's loan to Borrower No. 1 originated on February 11, 1986, as a drawdown of $400 million on an established line of credit. The loan was for the purpose of purchasing a 3.7 acre of parcel of commercial real estate. (FDIC Ex. 2/107). The site to be purchased by the borrower has been found to be environmentally contaminated. The letter of credit, against which defaulted interest payments were being charged, was subject to an outstanding debt of $428 million secured by the contaminated site. The Examiner found that the loan was based on a out-of-date hand written financial statement dated April 12, 1990, which indicated that the borrower was not capable of servicing the debt. The bank Examiner recommended that the Bank discontinue the practice of charging interest payments to the undisbursed portion of the line of credit, and place the debt on a nonaccrual status.

iii. Borrower No. 2

   The line of credit involving borrower No. 2, a group made up of individuals, of business entities, and of a family trust, is on the Bank's watch list. Seventeen notes have been made to three individuals, three business entities, and one family trust. The borrowers, long time customers of the Bank, had for years been successful in other businesses (FDIC Ex. 2/115), but the loan was for an investment in the housing construction area, which proved unsuccessful. Borrowers' debt totals $385 million. (FDIC Ex. 2/115). Their demand deposit account has had 698 checks drawn on insufficient funds, and between January and November 18, 1991, has been overdrawn on 25 separate occasions. (FDIC Ex. 2/115). The overdrafts were construed as extensions of credit. The bank's files are lacking sufficient financial information on the individual borrowers and the business entities. The borrowers are not able to service the debt and have incurred substantially more debt than assets from their business ventures. The Examiner assigned a Loss classification to the portion of the line that was without collateral and assigned a Substandard classification to the remainder.

iv. Borrower No. 3

   Borrower No. 3 has held a line of credit since 1985. The proceeds of the extension of credit were used to purchase and develop lots in a real estate subdivision. (FDIC Ex. 2/135). Approximately 235 lots and 18 acres of undeveloped land in the subdivision se-


12 The only other source of income produced by the holding company is interest on its deposit account with the bank, which was approximately $574 on October 31, 1991. (FDIC Ex. 2/148).

13 The agreement stated in part, at Paragraph 2(e), that during the life of this Agreement, the bank shall not pay any dividends at any time it is in noncompliance with other specific paragraphs of the Written Agreement, or Section 658.37 of Florida Statutes. Prior to declaration of dividends, the board of directors will certify the bank's compliance with the cited sections and provide that certification to the State. (FDIC Ex. 2/7).
{{6-30-94 p.A-2431}}cure the debt. The loan file for this debt lacked current documentation. No recent financial information was found in the file other than a 1989 income tax return and the file lacked current appraisals for the collateral. President John Christo, III disputes the "special mention" listing of this loan, and believes the bank's collateral position remains strong, despite the lack of documentation.

v. Borrower No. 4

   As a result of the November 18, 1991 examination the Examiner made following conclusion as to this borrower:
   "The line has been allowed to become stagnant with no reduction since the 3-5-90 FDIC examination. The line has remained current through payment of interest and it appears that the borrower is dictating the terms of the arrangement. It is recommended that the bank management develop and implement a repayment plan that will provide for an orderly reduction program. Failure to do so may result in deterioration of this credit." (FDIC Ex. 2/136).
   The specific instances described above indicate that the Bank has been extending credit to inadequately capitalized borrowers, lending with insufficient documentation in the loan files, failing to establish an adequate repayment plan and extending credit through overdrafts and against uncollected deposit balances. After careful review of the evidence presented and testimony given, the undersigned determines that Respondent has engaged in hazardous lending and lax collection practices which have affected the financial well being of the institution.

3. Adversely Classified Loans

   The purpose of an adverse classification is to identify a bank's weak assets and more accurately reflect the true condition of the institution. There are three categories of adversely classified loans: substandard, doubtful, and loss.
   Substandard assets are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged if any. (TR. 75.) Loans classified substandard have apparent weaknesses jeopardizing the liquidation of the debt. (TR. 75). While a substandard classification does not require the institution to make adjustments to its capital account, it has been the general experience of the FDIC that the expected amount of loss to a bank for loans adversely classified "Substandard" is between 10 and 20 percent of the gross amount of such loans. (TR. 76, 100–101).
   Loans classified doubtful and loss are inadequately protected by the current sound worth and paying capacity of the obligor or collateral pledged. A doubtful classification generally results in fifty percent of such assets being deducted from primary and total capital in analyzing the capital of the bank. (TR. 101).
   Assets classified loss are charged off or deducted from stockholder equity in computing primary and total capital. A loss classification indicates that the asset is considered uncollectible and is considered unwarranted as a bankable asset. (TR. 75).
   The FDIC Examiner found that the level of adversely classified loans was excessive. (TR. 97–99). As of the November 18, 1991 examination report, the Bank's adversely classified loans and leases totaled $13,657,000. Of that total amount, $11,457,000 was adversely classified Substandard; $458,000 was adversely classified Doubtful; and $1,742,000 was adversely classified Loss. (FDIC Ex. 2/16). The Examiner testified that adversely classified loans and those classified loss have been increasing in comparison to past bank examinations as indicated below:

3/5/903/31/9111/18/9114
Assets
Classified
Loss (TR. 78)$2,000$1,478,000$2,140,000
Total
Adversely
Classified
Loans (TR. 97)7,309,00013,074,00013,657,000

   While the percent of overdue loans and leases to gross loans and leases have not steadily increased during the last three bank examinations, the Examiner found that they have been consistently excessive. (TR. 98). The March 5, 1990, FDIC examination indicates that the relation of overdue loans and leases to gross loans and leases is 8.63%.


14 March 5, 1990 FDIC Bank Examination; March 31, 1991 Florida State Bank Examination; November 18, 1991 FDIC Bank Examination.
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The Florida State March 31, 1991 bank examination reflects the ratio is 6.18% and the FDIC examination of November 18, 1991 indicates the ratio is 8.42%.
   It is well settled that deference must be given to a bank Examiners' adverse classification of loans, so long as such determination is not arbitrary, capricious, or outside a "zone of reasonableness." As stated in the decisions of the leading case of Sunshine State Bank v. FDIC, 783 F.2d 1580, 1582-83 (11th Cir. 1986):
       After extensive training, lengthy apprenticeship and careful evaluation, FDIC examiners are appointed as "commissioned examiners", and thereby vested with authority to make informed predictions about the risk inherent in a bank's assets. This exercise of informed judgment on the part of commissioned examiners is entitled to deference, and should not be disregarded in the absence of compelling evidence that it is without rational basis.
The decision goes on to provide that the court may not substitute its own subjective judgment for that of the Examiner experts, but may set aside the predictive classification only if they are without objective factual basis or shown to arbitrary and capricious. Id. at 1583. In the instant case, Respondent has not made the requisite showing to set aside the bank Examiner's adverse classifications.

4. Other Real Estate Owned

   Other real estate owned ("OREO") is property acquired by the Bank as a result of foreclosure on collateral securing a delinquent loan. (TR. 111). However, OREO is deemed to be a nonearning asset, is given an adverse classification, and should be disposed of at the first opportunity. (FDIC Ex. 2/13). In classifying OREO, an examiner considers the reason the property was acquired, the length of time it has been held and whether there are current appraisals. (TR. 112).
   The Examiner found, as of November 1991, that OREO was classified $5,571,000 Substandard, $29,000 Doubtful, and $252, 000 Loss. (FDIC Ex. 2/13). OREO constituted approximately 4.8% of total assets and approximately 29.5% total items subject to adverse classification. (FDIC Ex. 2/13). A review of past bank examination reports reveals a continuing increase in adversely classified OREO—$4,005,000 at the March 5, 1990 FDIC examination, $5,881,000 at the Florida state March 31, 1991 examination, and $6,032,000 at the FDIC November 1991 examination. (TR. 114). Examiner Olsen found the OREO to be excessive and that the significant number of OREO adversely impacted the Bank's earnings and general wellbeing. (TR. 113).
5. Allowance for Loan and Lease Losses
   Allowance for loan and lease losses (ALLL) provides a cushion for anticipated losses in the loan portfolio. (TR. 116–117). It is otherwise known as a loan valuation reserve and is a permanent segregation to the capital accounts. If the allowance for loan and lease losses is underfunded, then capital accounts are considered overstated and the true condition of the bank's capital is not accurately reflected. (TR. 117).
   The Examiner determined the allowance for loan and lease loss to be severely deficient in light of the number of adversely classified loans.15 (TR. 119. FDIC Ex. 2/11). Examiner Olsen judged the reserve to be deficient by approximately $1,399,000. (TR. 120. FDIC Ex. 2/23).
   A primary reason for the inadequate protection of the reserve against anticipated losses was the Bank's deficient watchlist. (FDIC Ex. 2/11). The Examiner found that "less than a seven percent reserve has been established in relation to the total dollar volume of watchlist loans, when 52 of 63 lines


15 A January 25, 1993 letter advised Respondent's counsel that an accounting error by the FDIC had been found, by which $1,004,000 was deducted from Bank's capital. (TR. 260–265). The Atlanta Regional Office had erroneously changed the numbers of the Bank's adjusted Tier 1 capital due to a deduction taken for the deficiency in the allowance for loan loss reserve. (TR. 236). This resulted in the allowance for loan and lease losses to be subtracted twice. (TR. 245). After the correction was made, however, the Examiner still found that the Bank's capital remained inadequate. (TR. 264–265).
   Assistant Regional Director James Shumaker also testified that even after the numbers were correctly adjusted Respondent Bank was still below the 6.5 percent Tier 1 capital which, in a written agreement with Florida state authorities, it had agreed to retain. (TR. 355). The capital requirement in the state written agreement is a stricter standard than the FDIC capital requirement, and though Respondent violated the terms in the written agreement it had sufficient capital to meet FDIC's capital requirement. (TR. 458). However, the FDIC also agreed to the terms in the agreement with the state and, because of the condition of the Bank, held the Bank to the stricter standard. (TR. 458–460).
{{6-30-94 p.A-2433}}on the October 31, 1991 watchlist are adversely classified" at the examination of November 18, 1991. (FDIC Ex. 2/11). The Examiner gives three examples in which anticipated losses were underestimated. The loan to Borrower No. 1 was adversely classified $458,000 Doubtful and the reserve calculation as of October 31, 1991 watchlist totaled zero. (FDIC Ex. 2/11). The loan to Borrower No. 5 was adversely classified $373,000 Loss, whereas the watchlist reserve calculation totaled $254,000, (FDIC Ex. 2/12), and the loans to Borrower No. 6 were already classified $134,000 Loss, whereas the watchlist reserve calculation totaled $86,000. (FDIC Ex. 2/12).
   In addition to underestimating the anticipated losses of problem loans on the watchlist as discussed above, the Bank failed to include weak credits on the watchlist, resulting in a shortfall in the reserve. The Examiner determined that the loans to Borrower No. 7 were adversely classified $802,000 Substandard16 and the loan to Borrower No. 8 was adversely classified $92,000 Substandard and that they should have been included on Bank's internal list. (FDIC Ex. 2/12). Further, nonaccrual loans to Borrower No. 9 and Borrower No. 10 were also left off the October 31, 1991 watchlist.
   The Bank's allowance for loan and lease loss is inadequate. Respondent failed to provide an adequate cushion for anticipated losses in light of the excessive number of adversely classified loans.

6. Earnings

   The FDIC Examiners reviewed the adequacy of Respondent's earnings by considering in part the Bank's net income and overhead expenses. (TR. 130). The Examiners found that the Bank's earnings had declined dramatically (TR. 136–137; FDIC Ex. 2/20) due to a decline in the Bank's net income, which decreased, after payment of taxes, from $1,550,000 in 1989 to $1,345,000 in 1990 and to negative $976,000 as of October 31, 1991. (FDIC Ex. 2/20). The Examiner attributed the deterioration of Bank's earnings to increased and excessively high overhead expenses, to wit, 5.45 percent of Average Assets as of December 30, 1990 (FDIC Ex. 2/20); hazardous lending and lax collection practices (TR. 133–134); and an increase in loan losses. (TR. 133). While the undersigned finds that the agency has not, by a preponderance of the evidence, proven that overhead expenses were excessive, or that such contributed materially to the dramatic loss of earnings, he finds the Bank's earnings deficient and overstated due to the other factors stated herein.

C. FEDERAL BANK LAWS AND REGULATIONS

   The Bank is charged with violating Section 22(h)(3) of the Federal Reserve Act, 12 U.S.C. § 375b(3), and implementing Regulation O of Board of Governors of the Federal Reserve System,17 12 C.F.R. Part 215.4 (a)18 ("Regulation O") as well as section 23A of the Federal Reserve Act, 12 U.S.C. § 371c.19

1. REGULATION O

   The intent of Regulation O is to control loans to insiders, by prohibiting a bank from extending credit to its executive officers, directors or principal shareholders, or to any related interest of such persons, unless the extension of credit (1) is made on substantially the same terms as those prevailing at the time for comparable transactions with persons who are not covered by the Regulation, and (2) does not involve more than the normal risk of repayment or present other unfavorable features. 12 U.S.C. § 375b(3); 12 C.F.R. § 215.4(a).20


16 Respondent disputes this classification asserting that the borrower of loan number 7 had cash deposits in the Bank in excess of what he borrowed. Further, Respondent asserts that payments on the loan have been made since the examination report. (TR. 774–775; R Ex. 99/41). While the argument as to this loan may be correct and even have properly disputed the Examiner's finding, later payments, as hereinafter discussed, are not relevant, and the findings of ALLL violations as to the other borrowers remain.

17 Section 22(h) of the Federal Reserve Act is made applicable to State Nonmember Banks under the provisions of Section 18(j) of the Federal Deposit Insurance Act. Regulation O of the Federal Reserve Board implements the provisions of Section 22(h) of the Federal Reserve Act.

18 Although the November 18, 1991 examination report (FDIC Ex. 2/23-24) indicates that Respondent Bank violated several sections of 215 of Regulation O, enforcement counsel indicated at hearing that only section 215.4(a) was the subject of this proceeding. (TR. 149).

19 Section 23A of the Federal Reserve Act is made applicable to insured nonmember banks through Section 18(j) of the Federal Deposit Insurance Act.

20 Section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375b, and Regulation O of the Board of Governors of (Continued)

{{6-30-94 p.A-2434}}
   Any individual or company having the power to vote more than ten percent of any class of voting securities of a member bank or company is a primary shareholder.21 (TR. 160; 12 C.F.R. §215.2(j)). Pursuant to section 215.2(a), a trust, business or otherwise, comes within the definition of a "company." Therefore, the Trust comes clearly within the purview of Regulation O.
   The Bank has extended credit to the trust (1) on special terms in violation of bank policy and (2) at a risk greater than normal as discussed below.22

a. Special Treatment

   12 C.F.R. section 215.4(a)(1) of Regulation O requires insider loans to be made on substantially the same terms as other loans including interest rates and collateral. The board minutes dated February 19, 1991 reflect an approval of the unsecured Letter of Credit to the Trust. (FDIC Ex. 2/29; FDIC Ex. 8/15-16; TR. 166, 169). The approval of the Letter of Credit was based on a stale financial statement, and the minutes of the Board of Directors make no showing that the Board ever considered the interest rate, the collateral, or the repayment terms. (FDIC Ex. 2/29). Further, Bank's loan policy provides that business financial statements should also include a statement of income and no such statement was included in the records. (TR. 163). This letter of credit was approved in violation of existing written bank policy.

b. Greater Than Normal Risk

   12 C.F.R. section 215.4(a)(2) of Regulation O permits insider loans if the extending of such credit or letter of credit does not pose a risk of repayment that is greater than normal. The Trust has no real source of repayment since the dividend income received on the stock of Florida Bay Banks, Inc. was minimal, and stock held in Bay Trust was also of little value since the institution was ailing and has since become insolvent. In fact, the Bank issued the Letter of Credit after the trust became incapable of servicing its debt to SouthTrust. Therefore, the loan to the Trust with no documented source of repayment ability exhibited a risk greater than normal.

2. Section 23A

   Section 23A of the Federal Reserve Act, 12 U.S.C. § 371c primarily restricts loans to affiliates. (TR. 147). Each loan or extension of credit or letter of credit issued by a bank on behalf of an affiliate is required to be secured at the time of the transaction by collateral. The Letter of Credit to the Trust was made by the Bank without collateral violating the above provision. The issue to be determined is whether the Trust is an "affiliate" subject to section 23A.

a. Affiliate

   The term affiliate includes any company controlling a bank or any company controlled23 by the company that controls a bank.


20Continued: the Federal Reserve System, 12 C.F.R. Part 215, are intended to curb the granting of unlimited credit or preferential terms to bank insiders. Section 22(h) was revised and recodified by section 306 of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), Pub. L. No. 102–242, 105 Stat. 2236, 2355–2359 (December 19, 1991), and implementing Regulation O of the Board of Governors of the Federal Reserve System was revised effective May 18, 1992, 57 Fed. Reg. 22417-26, and recodified at 12 C.F.R. Part 215 (1993). The amendments to section 22(h) of the Federal Reserve Act and Regulation O are, for the most part, prospective and do affect the extensions of credit which are implicated in the violations of law alleged by the FDIC in this proceeding because the extensions of credit occurred prior to the statutory and regulatory amendments. The pre-FDICIA versions of section 22(h)(3) and Section 215.4(a) (terms and credit-worthiness provisions) are now codified, as amended, at section 22(h)(2)(A), (B) of the Federal Reserve Act, 12 U.S.C. § 375b(2)(A), (B) and 12 C.F.R. § 215.4(a) (1993), respectively.

21 JCJ Irrevocable Trust owns 65.54 percent common stock of Florida Bay Banks, the holding company that owns Respondent Bank. Tr. 159; FDIC 9/2. Even by Respondent's own argument, the trust owns 10.76 percent of common and preferred shares (R's Posthearing Br. 14) and accordingly the trust holds over 10 percent of the votes and meets the definition of a principal shareholder.

22 To establish a violation of section 215.4(a) of Regulation O the FDIC is not required to prove both preferential terms and abnormal risk of repayment but, rather, is only required to prove either preferential terms or more than the normal risk of payment or other unfavorable features. See Bullion v. Federal Deposit Ins. Corp., 881 F.2d 1368, 1374 (5th Cir. 1989). In this instance, both the above can be proven.

23 The term "control" is defined in section 23A(b)(3)(A) to include close relationships between a company and a bank where the company owns or has the power to vote 25 percent or more of any class of voting securities of the bank or where the company controls in any manner the election of a majority of the bank's directors. JCJ Irrevocable Trust is controlled by John Christo, III, who is the sole voting trustee (TR. 650–652; FDIC Ex. 18) of the trust whose beneficiaries include John Christo, III, Irene Christo, and Phillip Christo. The beneficiaries along with their father, John Christo, Jr. control both the Bank and its holding company through stock ownership and director and officer positions. (JS ¶§ 8, 9, 10, 11, 12, and 13; FDIC Ex. 9/12; TR. 576–581, 627–629).
{{6-30-94 p.A-2435}}§371c(b)(1)(A). An affiliate is also defined as a bank subsidiary ((b)(1)(B)) and defined as a company controlled directly or indirectly by or for the benefit of shareholders who beneficially or otherwise control the bank. §371c(b)(1)(C).

b. Company

   The statute defines "company" as either a corporation, a partnership, a business trust, an association, or a similar organization. §371c(b)(6). The Trust must meet the definition of a "company" under the statute to be considered an "affiliate" for 23A purposes.
   The statute lists five forms of entities which constitute a "company." The Trust is neither a corporation, nor a partnership, nor a "business" trust. The final two forms of entity are an "association or similar organization," and are more loosely defined than the previous entities. However, since the beneficiaries of the Trust did not actively come together for a common purpose but instead were selected to be beneficiaries the Trust cannot be said to be an association.

c. Similar Organization

   Thus, the issue turns on whether the Trust comes within the catch-all provision of a "similar organization" to the four previously listed entities in the statute. The trust is "similar" in nature to the entities listed. It exhibits many of the characteristics and features of the corporate and other entities designated in section 23A(b)(6). These features include: (1) apparent long-term duration (FDIC Ex. 8/2-14; (2) control by the persons who are the beneficiaries of the trust (TR. 630, 650–652; (JS ¶34); (3) centralized management (JS ¶34; TR. 650–652); (4) engaging in business activities such as acquisition of bank stocks (TR. 631–632); (5) highly leveraged asset structure (FDIC Exs. 8/28-29; 18; JS ¶34; TR. 630–643); (6) limitation of personal liability of the beneficiaries for the Trust's debts; and, (7) use of the Trust by the Christo family as a vehicle to control a majority of the common stock of the Bank's parent bank holding company. (FDIC Ex. 9/2). Since the Trust has features and characteristics analogous in terms of function, structure and purpose to the corporate and other entities specified in section 23A(b)(6), it is hereby found to fall within the intended meaning of "company" for the purpose of establishing the affiliate relationship under section 23A of the Federal Reserve Act.

d. Violation

   The Trust is an affiliate for purposes of section 23A and controls Respondent Bank. The Trust owns and controls 42,436 shares, or 65.54 percent of the common stock of Florida Bay Banks, Inc. (TR 167), a bank holding company which, in turn, owns 100 percent of the capital stock of the Bank. (JS ¶11; 12; FDIC Ex. 9/2). Further, the Trust is controlled for the benefit of John Christo, III, Irene Christo and Phillip Christo who, together with their father, John Christo, Jr., control both the Bank and its parent bank holding company through stock ownership and director and officer positions.24 (JS ¶§ 8, 9, 10, 11, 12, and 13; FDIC Ex. 9/2; TR. 576–581, 627–629).
   The Trust is clearly subject to the restrictions imposed in section 23A as discussed above. Respondent Bank issued an unsecured letter of credit and later funded the letter of credit with an unsecured promissory note violating Section 371c(c) which required the transactions to be secured by collateral. (TR. 169. FDIC Ex. 229-30).

E. SIGNIFICANCE OF IMPROVED CONDITIONS

   Courts have consistently held that the discontinuance of unsafe or unsound practices or violations of law, or the improvement of an institution's condition, is not a defense against the issuance of a cease and desist order.25 A cease and desist order is designed not only to eradicate past and present abusive or unlawful practices, but also to prevent or deter future harmful practices.
   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


24 As indicated previously, John Christo, III is the sole voting trustee of the trust (TR. 650–652; FDIC Ex. 18) and controls the trust for his benefit and the benefit of his sister, Irene Christo and his brother Phillip Christo. (TR. 630).

25 See, First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 681, 682, 683 (5th Cir. 1983); Del Junco v. Conover, 682 F.2d 1338, 1340 (9th Cir. 1982), cert. denied 459 U.S. 1146 (1983); and In the Matter of The Stephens Security Bank, Stephens, Arkansas, FDIC-89-234b, 2 P-H FDIC Enf. Dec. ¶5168 (1991).
{{6-30-94 p.A-2436}}
Corporation, 770 F.2d 81 (6th Cir. 1985),26 determined that circumstances and actions that occurred after the commencement of a section 8(b)27 enforcement action were irrelevant. The Bank of Dixie Court stated 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 a similar line of reasoning the Court in First State Bank of Wayne County also held that subsequent bank improvement was irrelevant to the determination of whether to issue a cease and desist order, stating 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 non-occurrence in the future.
770 F.2d at 82–83.
   The narrow improvement of bank's financial condition as presented in particular through Respondent's witnesses and the July 1992 state bank examination report is not sufficient to bar the imposition of a cease and desist order in light of the above case law.28 Management's efforts to improve the condition of the institution are acknowledged but the order must be entered in order to protect against future continued violations.

F. COMMENTARY

   By both oral testimony and documentary exhibits, the agency Enforcement counsel have presented a preponderance of the evidence proving the need and justification for imposition of a cease and desist order. The ailing real estate and tourism markets of the area no doubt affected the condition of the Respondent Bank, as declining economic conditions did on all banks, but Respondent Bank also made poor business judgments, such as lending based on stale financial statements, lending to borrowers incapable of repayment, and blurring the distinction between the best interest of Bank and best interest of the Christo family. Management's active efforts to improve Bank's condition have not gone unnoticed, but under the circumstances are not sufficient to alter the determination herein. The imposition of a cease and desist order is not intended to be punitive, but rather its purpose is to aid in rehabilitating the institution.

V. CONCLUSIONS OF LAW

A. Jurisdiction and Burden of Proof
   1. The Bank 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.
   2. The Bank 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).
   3. The Bank is and was, at all times pertinent to this proceeding, subject to section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375b, made applicable to insured State nonmember banks pursuant to section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2).
   4. The Bank is and was, at all times pertinent to this proceeding, subject to Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215, made applicable to insured State nonmember banks pursuant to section 337.3 of the


26 The decision of the FDIC's Board of Directors concerning Bank of Dixie is reported 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.


27 12 U.S.C. § 1818(b)


28 Respondent relies on Doolittle v. National Credit Union Association, 992 F.2d 1531 (11th Cir. 1993) to support the theory that Bank's voluntary corrective measures rebut FDIC's allegations of unsafe or unsound practices. Doolittle involved a 12 U.S.C. § 1818(e) prohibition and restitution action, which has a different legal standard from the cease and desist action in the instant case. A prohibition action requires a showing of personal dishonesty or reckless disregard. Ultimately the Court in Doolittle vacated NCUA Board's prohibition order and remanded the case for reconsideration after determining that Respondent did not act with reckless disregard. Respondent's reliance on this case in this instance is inapposite.

{{6-30-94 p.A-2437}}FDIC's Rules and Regulations, 12 C.F.R. § 337.3.
   5. The FDIC has jurisdiction over the Bank, the Bank'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.
   6. The Trust is a "principal shareholder" of the Bank, as that term is defined in section 215.2(j) of Regulation O, 12 C.F.R. § 215.2(j) (1992), because the Trust owns and/or controls 65.5 percent of the voting common stock of Florida Bay Banks, Inc., the parent bank holding company of the Bank.
   7. The letter of credit (No. 509) and the extension of credit (note no. 2701444850) issued and extended by the Bank in favor of the Trust are "extensions of credit," as that term is defined in section 215.3 of Regulation O, 12 C.F.R. § 215.3 (1992).
   8. The FDIC's burden of proof in this proceeding in one of a preponderance of the evidence.

B. Opinions and Conclusions of FDIC Examiners

   9. 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 and conclusions are shown to be arbitrary or capricious or outside a zone of reasonableness.

C. Violation of Law

   10. The Bank has engaged in unsafe or unsound banking practices within the meaning of section 8(b) of the Act, 12 U.S.C. § 1818(b).
   11. The Bank, acting through its board of directors, violated section 22(h)(3) of the Federal Reserve Act, 12 U.S.C. § 375b(3), and implementing section 215.4(a) of Regulation O, 12 C.F.R. § 215.4(a) (1992), in connection with the Bank's extensions of credit to the Trust, a principal shareholder of the Bank.
   12. The Bank, acting through its board of directors, violated section 23A(c)(1) of the Federal Reserve Act, 12 U.S.C. § 371(c)(1), in connection with issuance of the letter of credit (no. 509) to the Trust and the extension of credit (note no. 2701444850) to the Trust.

VII. 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 Bay Bank and Trust Co. It is recommended that Respondent be required to cease and desist from engaging in the unsafe or unsound practices, and violations of law, as found herein, and to correct adverse conditions resulting therefrom.
/s/ Walter J. Alprin
Administrative Law Judge
Office of Financial Institution
Adjudication
December 10, 1993

PROPOSED ORDER

In the Matter of
BAY BANK & TRUST CO.
PANAMA CITY, FLORIDA
(Insured State Nonmember Bank)
Docket No. FDIC-92-313b

ORDER TO CEASE AND DESIST

   The Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") having considered the record and the applicable law, finds and concludes that Bay Bank & Trust Co., Panama City, 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 law and regulations:
   A. Failing to provide adequate supervision over and direction of the Bank by the board of directors of the Bank to prevent unsafe or unsound practices and violations of law and regulations;
   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 {{6-30-94 p.A-2438}}volume of adversely classified assets and non-earning assets;
   D. Engaging in hazardous lending and ineffective and lax collection practices, including but not limited to: (i) lending to businesses which are inadequately capitalized; (ii) overlending to borrowers who lack reasonable capacity for repayment; (iii) failing to establish and/or enforce repayment programs; (iv) extending credit through overdrafts and/or advancing funds against uncollected deposit balances without proper controls to limit exposure to the Bank; and (v) extending credit without adequate financial information and other loan documentation to support the extensions of credit, including but not limited to current financial statements and evidence of insurance for collateral real estate.
   E. Engaging in practices which produce inadequate operating income and excessive loan losses;
   F. 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;
   G. Failing to operate the Bank with adequate internal controls and accounting systems to prevent unsafe and unsound practices, as more fully described on page 6-c of the FDIC's Report of Examination of the Bank as of November 18, 1991; and
   H. Engaging in violations of applicable laws and regulations, as more fully described on pages 6-b through 6-b-2 of the FDIC's Report of Examination of the Bank as of November 18, 1991.
   IT IS FURTHER ORDERED that the Bank and its successors and assigns take affirmative action as follows:
   1. (a) Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include (i) a new chief executive officer with proven ability in managing a bank of comparable size and with comparable asset problems, (ii) a new chief operating officer with proven ability in managing the daily operations of a bank of comparable size and operational problems, and (iii) a senior lending officer with proven ability in managing a loan portfolio of comparable size and with an appropriate level of lending, collection and loan supervision experience necessary to supervise the upgrading of a low quality loan portfolio.29 Such management shall be provided with 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) maintain all aspects of the Bank in, or, if necessary, restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity. As 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 proposed 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. § 1831(i) and implementing regulations; must include the names and qualifications of any replacement personnel; and must be provided at least thirty (30) days prior to the individual's assuming the new position.
   (b) To facilitate compliance with paragraph 1(a) of this ORDER, the board of directors shall, in no more than thirty (30) days from the effective date of this ORDER, appoint an individual or a committee of individuals who are independent with respect to the Bank to develop, within ninety (90) days from the effective date of this ORDER, a written analysis and assessment of the Bank's management and staffing needs ("Management Plan"), which shall include, at a minimum:

       (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank;
       (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
       (iii) evaluation of each Bank officer and staff member to determine whether these individuals possess the ability, ex-

29 Any such officer employed or appointed for the first time after November 18, 1991, shall be considered as "new."
{{6-30-94 p.A-2439}}
    perience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and
       (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the board of directors determines are necessary to fill Bank officer or staff member positions consistent with the analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b) (iii) of this ORDER.
   (c) The Management Plan and all subsequent modifications to the Management Plan shall be submitted to the Regional Director for review and comment. Within thirty (30) days from receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall approve the Management Plan 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 Plan and shall implement and follow any modifications to the Management Plan as such modifications may be made from time to time.
   (d) For purposes of this ORDER, an individual who is "independent with respect to the Bank" shall be any individual (i) who is not an officer or director of the Bank or any of its affiliated organizations and who does not own more than five (5) percent of the outstanding shares of the Bank or any of its affiliated organizations, (ii) who is not related by blood, marriage or common financial interest to an officer or director of the Bank or to any stockholder owning more than five (5) percent of the outstanding shares of the Bank or any of its affiliated organizations, and (iii) who is not indebted to the Bank, directly or indirectly (including the indebtedness of any entity in which the individual has a substantial financial interest), in an amount exceeding five (5) percent of the Bank's total equity capital and allowance for loan and lease losses.
   2. (a) Within thirty (30) days after the effective date of this ORDER, and within thirty (90) days after each March 31, June 30, September 30, and December 31 date thereafter while this ORDER remains in effect, the Bank shall calculate its Tier 1 capital as a percentage of its total assets (this percentage shall be referred to as the Bank's "capital ratio") as of the nearest preceding March 31, June 30, September 30, or December 31 date. If such capital ratio is less than six and one-half (6.5) percent, then, within ninety (90) days from the date of such calculation, the Bank shall increase its Tier 1 capital by an amount sufficient to raise its capital ratio to not less than six and one-half (6.5) percent as of the nearest preceding March 31, June 30, September 30, or December 31 date.
   (b) Any increase in Tier 1 capital which may be required by paragraph 2(a) of this 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 November 18, 1991, and charged off in accordance with paragraph 4 of this ORDER;
       (iii) The direct contribution of cash by the directors and 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.
       (c) (i) If all or part of any increase in the Bank's Tier 1 capital which may be required under paragraph 2(a) of this ORDER is accomplished by the sale of new securities, the 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 shareholders), the Bank shall prepare detailed offering materials fully describing the securities being offered, including {{6-30-94 p.A-2440}}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, 550 17th Street, N.W., Washington, D.C. 20429 for review. All changes requested by the FDIC to be made in such offering materials shall be made prior to their dissemination.
       (ii) In complying with the provisions of paragraph 2(c)(i) of this ORDER, the Bank shall provide to each subscriber and/or purchaser of the Bank's 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 2(c)(ii) of this 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.
   (d) In addition to the requirements of paragraph 2(a) of this ORDER, for as long as this ORDER remains in effect, the Bank shall meet the minimum ratio requirements established for "risk-based capital" by the deadlines set out in Appendix A of Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, which Appendix A is entitled "Statement of Policy on Risk-Based Capital," as such minimum ratio requirements and deadlines may be modified from time to time by amendments to the FDIC's Rules and Regulations.
   (e) For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in section 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).
   3. (a) Within thirty (30) days from the effective date of this ORDER, and concurrently with compliance with the requirements of paragraph 4 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 3(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 review shall include consideration of loans internally classified during the Bank's loan review process, loans adversely classified at FDIC or State of Florida Banking Department examinations of the Bank, and delinquent non-performing loans. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of any recommended changes 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 November 18, 1991, shall reflect a provision for the allowance for loan and lease losses necessary to comply with paragraph 3(a) of this ORDER. If necessary to comply with this paragraph 3(b) of the ORDER, the Bank shall file amended Reports of Condition and Income within thirty (30) days from the effective date of this ORDER.
   4. Within thirty (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 the FDIC's Report of Examination of the Bank as of November 18, 1991, which have not been previously collected or charged off, unless otherwise approved in writing by the Regional Director. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection for the {{6-30-94 p.A-2441}}purpose of this paragraph 4 of the ORDER.
   5. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall submit to the Regional Director a written plan of action to reduce each asset which was adversely classified by the FDIC as of November 18, 1991, and which aggregated two hundred thousand dollars ($200, 000) or more as of that date. Such plan of action shall be implemented by the Bank and monitored, and progress reports regarding the implementation of such plan shall be submitted by the Bank to the Regional Director at ninety (90) day intervals concurrently with the other reporting requirements set forth in paragraph 17 of this ORDER.
   (b) As used in this paragraph 5 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.
   6. (a) Effective the date of this ORDER, the Bank shall not knowingly or with good cause to have known 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, prior to the extension of credit, a majority of the Bank's board of directors: (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 5(a) of this ORDER as to such borrower; (iii) determines that the extension of credit is in full compliance with the Bank's loan policy; (iv) determines that all necessary loan documentation is on file, including but not limited to, current financial and cash flow information and satisfactory appraisal, title and lien documents; and (v) approves such advance. A written record of the board of directors' determination and approval of any advance under this paragraph 6(b) of the ORDER shall be maintained in the credit file of each affected borrower as well as in the minutes of the board of directors.
   (c) The requirements of this paragraph 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.
   7. (a) Within thirty (30) days from the effective date of this ORDER, and in accordance with the Instructions for the Reports of Condition and Income, the Bank shall revise on its books all accrued and unpaid interest on any loan that is ninety (90) days or more delinquent in principal or interest payments and is not both well secured and in the process of collection.
   (b) Effective the date of this ORDER, the Bank shall not: (i) accrue interest on any loan that is, or becomes, ninety (90) days or more delinquent in principal or interest payments unless the loan is both well secured and in the process of collection; (ii) add uncollected interest to the unpaid principal balance of any loan on which interest is due unless such addition is supported by additional tangible collateral which adequately and completely secures the loan; (iii) extend credit by means of a new note for uncollected interest due on any loan unless such new extension of credit is supported by additional tangible collateral which adequately and completely secures the loan; or (iv) book uncollected interest by any other means in contravention of the Instructions for Reports of Condition and Income.
   (c) For purposes of this paragraph 7 of the ORDER, "well secured" and "in the process of collection" shall have the same meanings as those terms have in the prevailing Instructions for the Reports of Condition and Income.
   8. Within sixty (60) days from the effective date of this ORDER, the Bank shall review and revise, if necessary, its written loan policy to include the following elements:
{{6-30-94 p.A-2442}}
       (a) The requirement that before advancing any loan the Bank will obtain, analyze, and verify credit information which will be sufficient to identify a source of funds to repay the debt and support the scheduled repayment plan;
       (b) The requirement that all collateral documentation, or evidence of collateral documentation, has been obtained and reviewed before loan proceeds are distributed;
       (c) The requirements for maintenance and review of complete and current credit files on each borrower with loans outstanding;
       (d) Establishment of criteria and guidelines for the acceptance and review of financial statements; and
       (e) Provision for limiting loans to any one borrower or related group of borrowers involving the same collateral or income source to no more than twenty-five (25) percent of the Bank's total equity capital, and establishment of an acceptable system for identifying the Bank's total risk exposure to any one borrower or related group of borrowers involving the same collateral or income source, including direct and indirect funded extensions of credit and unfunded commitments.
   Thereafter, the Bank and its successors and assigns shall implement and follow the loan policy and shall implement and follow any modifications to the loan policy as such modifications may be made from time to time.
   9. (a) Effective the date of this ORDER, all new loans or lines of credit extended by the Bank (including renewals and extensions of existing loans and lines of credit, but excluding additional advances under existing lines of credit) in an amount of two hundred thousand dollars ($200, 000) or more shall require the prior approval of the Bank's board of directors or of the committee which shall include at least two voting members who are directors of the Bank and who are not Bank officers or employees, and which is designated by the board to review and approve loans ("Loan Committee").
   (b) All loans or lines of credit required by paragraph 9(a) of this ORDER to be submitted to the board of directors or the Loan Committee for review and approval shall be supported by a written summary that provides information sufficient for the board of directors or the Loan Committee to make a prudent decision. Such written information shall include, at a minimum, the following:
       (i) The total amount and status of the borrower's current indebtedness to the Bank and the amount of the new extension of credit proposed;
       (ii) The purpose of the proposed extension of credit;
       (iii) The source of repayment;
       (iv) The method of repayment;
       (v) The interest rate payable by the borrower;
       (vi) The maturity of the debt;
       (vii) A description and valuation of collateral, if secured; and
       (viii) A statement of whether the loan or line of credit complies in all respects with the written loan policy of the Bank, and, if not, a statement of the reasons justifying deviation from the Bank's loan policy.
   10. Subsequent to the effective date of this ORDER, the Bank shall not extend credit to any person or entity through overdrafts or by advancing funds against uncollected deposit balances without adequate controls to limit the Bank's risk exposure. Any such extensions of credit shall comply with all applicable state and Federal laws, rules and regulations and with the Bank's written loan policy requirements for both unsecured lending and extensions of credit through overdrafts. The Bank and FDIC shall agree upon a mutually acceptable emergency lending plan within thirty (30) days from the effective date of this ORDER.
   11. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall prepare a realistic and comprehensive budget and earnings forecast for calendar year 1993 and shall submit this budget and earnings forecast to the Regional Director for review and comment.
   (b) 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 as of January 1 of each year subsequent to 1993 and shall submit them to the Regional Director for review and comment no later than January 31 of the budget year.
   (c) In preparing the budget and earnings {{6-30-94 p.A-2443}}forecasts required by this paragraph 11 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.
   (d) In preparing the budget and earnings forecasts, particular emphasis shall be given to limiting overhead expenses.
   (e) 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 17 of this ORDER.
   12. Within thirty (30) days from the effective date of this ORDER, the Bank shall take all necessary steps, consistent with sound banking practices, to eliminate or correct all alleged violations of law and regulations described on pages 6-b through 6-b-2 of the FDIC's Report of Examination of the Bank as of November 18, 1991. In addition, the Bank shall adopt appropriate procedures designed to ensure its future compliance with all applicable Federal and state laws and regulations.
   13. Within thirty (30) days from the effective date of this ORDER, the Bank shall develop a written plan and strategy for achieving within a reasonable time frame, and thereafter maintaining, at least the minimum liquidity ratio required in the Bank's Assets/Liability Management Policy. Thereafter, the Bank, its directors, officers and employees shall follow the written liquidity ratio plan and strategy and its Assets/ Liability Management Policy, and any subsequent modifications thereto, and shall report its liquidity position to the Regional Director concurrently with the other reporting requirements specified in paragraph 17 of this ORDER.
   14. Within thirty (30) days from the effective date of this ORDER, the Bank shall correct the internal routine and control deficiencies described on page 6-c of the FDIC's Report of Examination of the Bank as of November 18, 1991.
   15. Effective the date of this ORDER, the Bank shall not pay any cash or property dividends without the prior written consent of the Regional Director.
   16. 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, 555 17th Street, N.W., Washington, D.C. 20429, for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   17. Within ninety (90) days from the effective date of this ORDER and within thirty (30) days following the end of each calendar quarter 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 of such actions. 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 board of directors of the Bank and made a part of the minutes of the appropriate board meeting.
   18. The provisions of this ORDER shall become effective thirty (30) 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 ____, 1994.

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