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[¶10,069] In the Matter of First Bank, McComb, Mississippi, Docket No. FDIC-90-74b (4-27-90).
Bank to cease and desist from practices such as engaging in hazardous lending and lax collection practices; operating with inadequate primary capital, with a large volume of poor quality loans, with an inadequate loan valuation reserve, in a manner as to produce operating losses, in violation of federal and state law, with a Board of Directors which has failed to provide adequate supervision and direction to the Bank, and with management whose policies and practices are detrimental to Bank. (This order was terminated by order of the FDIC dated 9-15-92; see ¶ 15,525.)
[.1] Management—Qualifications—Compliance
[.2] Definition—"Outside Director"
[.3] Primary Capital—Increase—Methods
[.4] Assets—Adversely Classified—Reduce
[.5] Loans—Extension of Credit—Curtail
[.6] Loans—Collection Policies and Procedures—Interest Nonaccrual Policy
[.7] Loans—Loan Documentation
[.8] Loan Portfolio—Grading System—Periodic Review
[.9] Loan Loss Reserve—Adequacy—Review
[.10] Profit Plan—Minimum Requirements—Review
[.11] Violations of Law—Eliminate/Correct—Compliance
[.12] Trust Department—Statement of Principles—Minimum Requirements
[.13] Holding Company—Management Fees—Review
[.14] Shareholders—Dividends—Approval
[.15] Shareholders—Disclosure—Cease and Desist Order
[.16] Compliance—Progress Reports—Frequency
In the Matter of
FIRST BANK
McCOMB, MISSISSIPPI
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
First Bank, McComb, Mississippi ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated April 2, 1990, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and/or regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had committed violations of law and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED that the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Bank, cease and desist from the following unsafe or unsound banking practices and violations:
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(a) engaging in hazardous lending and lax collection practices;
(b) operating with inadequate primary capital;
(c) operating with a large volume of poor quality loans;
(d) operating with an inadequate loan valuation reserve;
(e) operating in such a manner as to produce operating losses;
(f) operating in violation of section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, made applicable to state nonmember banks by section 18(j)(1) of the Act, 12 U.S.C. § 1828(j)(1); and sections 81-1-91 and 81-3-9 of the Mississippi Code Annotated, Miss. Code Ann. §§ 81-1-91 (1979) and 81-3-9 (1984);
(g) operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits; and
(h) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank.
IT IS FURTHER ORDERED that the Bank take affirmative action as follows:
[.1] 1. (a) During the life of this ORDER, the Bank shall have management qualified to restore the Bank to a sound condition. Such management shall include a chief executive officer, an experienced senior lending officer responsible for supervising the Bank's overall lending function, and an experienced senior loan collection officer responsible for supervising the collection of delinquent loans, nonaccrual loans, loans adversely classified "Substandard", "Doubtful", or "Loss" as of October 27, 1989, and other real estate. Neither the chief executive officer, the senior lending officer, nor the senior loan collection officer, shall be the same individual.
(b) Present management shall be assessed on its ability to:
(i) Comply with the requirements of this ORDER;
(ii) Improve and thereafter maintain the Bank in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, and earnings adequacy; and
(iii) Comply with all applicable State and Federal laws and regulations.
(c) (i) During the life of this ORDER, the Bank shall notify the Regional Director of the Memphis Regional Office ("Regional Director") and the Commissioner, Department of Banking and Consumer Finance for the State of Mississippi ("Commissioner"), in writing of any resignations and/or terminations of any members of its board of directors and/or any of its senior executive officer(s).
(ii) The Bank shall comply with section 32 of the Act, 12 U.S.C. § 1831i, which includes a requirement that the Bank shall notify the Regional Director and the Commissioner in writing of any additions to its board of directors and senior executive officers.
(d) (i) To ensure both compliance with this ORDER and qualified management for the Bank, the board of directors, within 90 days from the effective date of this ORDER shall develop a written policy ("Management Policy") which shall incorporate an analysis of the Bank's management and staffing requirements and shall, at a minimum address (1) both the number and type of positions needed to properly manage the Bank, (2) a clear and concise description of the needed experience and pay for each job, (3) an evaluation of present management, (4) a plan to recruit, hire or replace personnel with requisite ability and experience, (5) a periodic evaluation of each individual's job performance, and (6) the establishment of procedures to periodically review and update the Management Policy.
(ii) The Management Policy and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. Within 30 days from receipt of any comment, and after consideration of such comment, the board of directors shall approve the Management Policy which approval shall be recorded in the minutes of the meeting of the board of directors. Thereafter, the Bank and its directors, officers and employees shall implement and follow the Management Policy and any modifications thereto.
(e) Within 30 days from the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure that the Bank complies with the provisions of this ORDER. At least two-thirds of the members of such committee shall be inde-
{{4-1-90 p.C-345}}pendent, outside directors as defined herein. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.
[.2] (f) For the purposes of this ORDER, an "outside director" shall be an individual:
(i) Who shall not be employed, in any capacity, by the Bank or its affiliates other than as a director of the Bank or an affiliate;
(ii) Who shall not own or control more than 5 percent of the voting stock of the Bank or its holding company;
(iii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than 5 percent of the Bank's primary capital;
(iv) Who shall not be related to any directors, principal shareholders, or affiliates of the Bank; and
(v) Who shall be a resident of, or engage in business in, the Bank's trade area.
[.3] 2. (a) Within 180 days from the effective date of this ORDER, the Bank shall increase its primary capital by no less than $3,000,000.
(b) In addition to the capital increase required by Paragraph 2(a), within 180 days from the effective date of this ORDER (unless an alternate timetable is submitted by the Bank and approved in writing by the Regional Director and the Commissioner) the Bank shall achieve and maintain adjusted primary capital equal to or greater than seven and one-half (7.5) percent of the Bank's adjusted part 325 total assets.
(c) Any increase in primary capital necessary to meet the requirements of Paragraphs 2(a) and 2(b) of this ORDER may be accomplished by the following:
(i) The sale of new securities in the form of common stock; or
(ii) The direct contribution of cash by the directors, shareholders, or parent bank holding company of the Bank; or
(iii) The collection in cash of assets classified "Loss" without loss or liability to the Bank; or
(iv) The collection of assets previously charged-off; or
(v) Any other method acceptable to the FDIC.
(d) If all or part of the increase in primary capital required by Paragraphs 2(a) and 2(b) of this ORDER is accomplished by the sale of new securities, the board of directors of the Bank shall adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation of the plan and, in any event, not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination.
(e) In complying with the provisions of Paragraph 2 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph shall be furnished within 10 days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.
(f) For purposes of this ORDER the terms "primary capital", "total capital" and "Part 325 total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respective-
{{4-1-90 p.C-346}}ly, subsections 325.2(h), 325.2(1) and 325.2(k), 12 C.F.R. 325.2(h), (1), (k). The "Analysis of Capital" schedule on page 3 of the FDIC Report of Examination provides the method for determining the ratio of adjusted primary capital to adjusted Part 325 total assets as required by this ORDER.
[.4] 3. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" and one-half of the loans classified "Doubtful" as of October 27, 1989, that have not been previously collected or charged-off. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
(b) Within 90 days from the effective date of this ORDER, the Bank shall have reduced the loans and other real estate classified "Substandard" as of October 27, 1989 and those loans and other real estate classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $11,200,000.
(c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the loans and other real estate classified "Substandard" as of October 27, 1989 and those loans and other real estate classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $9,750,000.
(d) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the loans and other real estate classified "Substandard" as of October 27, 1989 and those loans and other real estate classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $8,250,000.
(e) Within 540 days from the effective date of this ORDER, the Bank shall have reduced the loans and other real estate classified "Substandard" as of October 27, 1989 and those loans and other real estate classified "Doubtful" that have not previously been charged-off pursuant to this ORDER to not more than $7,000,000.
(f) Within 60 days of the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director and the Commissioner for review and approval a written plan setting forth the method by which the Bank will implement the reduction of the amount of classified loans and other real estate required by Paragraphs 3(b), 3(c), 3(d), and 3(e).
(g) Within 60 days of the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director and the Commissioner for review and approval a written plan of action directed at reducing the Bank's risk position in each security classified "Substandard" or "Doubtful" as of October 27, 1989, that have not been previously sold or charged-off. The plan shall include, but not be limited to, the following:
(i) Target dollar levels to which the Bank will reduce the total amount of securities classified "Substandard" or "Doubtful" within 90 days, 180 days, and 360 days from the effective date of this ORDER; and
(ii) Provisions for submissions of monthly written progress reports under this Paragraph 3(g) to the Bank's board of directors for review and recordation in the board minutes.
(h) As used in Paragraph 3 the word "reduce" means (1) to collect, (2) to charge-off, or (3) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.
[.5] 4. (a) Beginning with the effective date of this ORDER, the Bank shall not make any further extension of credit to any borrower whose loans are charged-off, in whole or in part, or are adversely classified "Loss" or "Doubtful" as of October 27, 1989 and remain uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.
(b) Beginning with the effective date of this ORDER, the Bank shall not make any further extension of credit to any borrower thereof whose loans in the aggregate exceed $100,000 and are adversely classified "Substandard" as of October 27, 1989 unless such extension has been approved by a majority of the Bank's board of directors in advance and the Bank's board of directors has detailed in the written minutes of the meeting how it has affirmatively determined all of the following: (i) that the extension of credit is in full compliance with the Bank's loan policy, (ii) that it is necessary to protect the Bank's interest or that the extension of credit is adequately secured, (iii)
{{4-1-90 p.C-347}}that based upon credit analysis the customer is deemed to be creditworthy, and (iv) that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title, and lien documents. The minutes shall also include the following information about the extension of credit: (i) the amount adversely classified as of October 27, 1989, (ii) the current balance, (iii) the amount of credit requested, (iv) a description of the collateral and its value securing the credit, and (v) a full description of the documentation presented to the board of directors including the date of the borrower's most recent financial information and the borrower's current income or cash flow data.
(c) Beginning with the effective date of this ORDER, the Bank shall not renew any loan without the full collection of interest due. The issuance of separate notes, to the borrowing customer or a third party, the proceeds of which pay interest due, shall not satisfy the requirements of this paragraph unless these separate notes receive prior board approval in the same manner as outlined in Paragraph 4(b).
[.6] 5. (a) Beginning with the effective date of this ORDER, the Bank shall review and strengthen its collection policies and procedures and adopt and implement a written loan interest nonaccrual policy which conforms with requirements contained in Instructions for Preparation of Reports of Condition and Income published by the Federal Financial Institutions Examination Council.
[.7] (b) Beginning with the effective date of this ORDER, the Bank shall initiate and implement a program to strengthen its credit files and correct the technical exceptions as detailed on pages 2-e and 2-e-1 of the October 27, 1989 Report of Examination. In all future operations, the Bank shall ascertain that all documents or evidence thereof, properly completed, are obtained before credit is extended.
[.8] 6. (a) Within 60 days of the effective date of this ORDER, the board shall establish an internal loan review and grading system ("System") to periodically review the Bank's loan portfolio and identify and categorize problem credits. At a minimum the System shall provide for:
(i) Identifying the overall quality of the loan portfolio;
(ii) The identification and amount of each delinquent loan;
(iii) An identification or grouping of loans that warrant the special attention of management;
(iv) For each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the reason(s) why the particular loan merits special attention;
(v) An identification of credit and collateral documentation exceptions;
(vi) The identification and status of each violation of law, rule or regulation;
(vii) An identification of loans not in conformance with the Bank's lending policy, and exceptions to the Bank's lending policy;
(viii) An identification of insider loan transactions; and
(ix) A mechanism for reporting periodically, not less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.
(b) A copy of the reports submitted to the board, as well as documentation of the action taken by the Bank to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.
[.9] 7. Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve shall be established by charges to current operating income, together with collection of assets previously charged-off. In complying with the provisions of this paragraph, the board of directors of the Bank shall review the adequacy of the Bank's reserve for loan losses prior to the end of each quarter. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of any increase in the reserve, and the basis for determination of the amount of the reserve provided.
[.10] 8. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt, and implement a written profit plan which shall contain formal goals and strategies consistent with sound banking practices, for the purpose of improving
{{4-1-90 p.C-348}}the overall earnings of the Bank. The plan shall include a written budget of income and expenses for calendar year 1990 and for each subsequent year this ORDER remains in effect. The plan and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.
[.11] 9. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law which are set out on page 6-b of the Report of Examination of the Bank as of October 27, 1989. In addition, the Bank shall henceforth comply with all applicable laws and regulations.
[.12] 10. (a) Within 30 days from the effective date of this ORDER, the Bank's board of directors shall readopt and implement the FDIC's Statement of Principles of Trust Department Management, as set forth in the October 27, 1989 Report of Examination of the Trust Department of the Bank.
(b) Within 60 days from the effective date of the Order, the Bank shall develop, adopt, and implement written procedures to insure the timely implementation of each provision of the Statement of Principles of Trust Department Management.
(c) Within 60 days from the effective date of the Order, the Bank shall contract for the performance of an outside audit of the First Bank Stock Ownership Plan and Trust. The outside audit shall be of sufficient scope to enable the auditor to provide an unqualified opinion.
(d) Within 90 days from the effective date of the Order, the Bank shall develop, adopt, and implement a written Trust Investment Policy and a written Conflict of Interest Policy each tailored to the specific needs of the Bank's Trust Department. The Conflict of Interest Policy shall address the actual conflicts of interests situations now present or perceived likely to arise after considering the type, nature, and volume of business presently conducted and/or planned to be conducted and shall include, at a minimum, the following:
(i) the use of own-bank and affiliate deposits;
(ii) the use of affiliate obligations;
(iii) the purchase of assets from or the sale of assets to other trust accounts and/or to the Bank's officers, directors and other institution-affiliated parties; and
(iv) the use of the Bank's subsidiary brokerage service.
[.13] 11. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt, and implement a written policy satisfactory to the Regional Director, which policy shall govern the relationship between the Bank and its holding company, and shall limit the payment of any management, consulting, or other fees or funds of any nature, directly or indirectly, to or for the benefit of the Bank's holding company to only those fees or funds paid in connection with services performed by the Bank's holding company on behalf of or for the benefit of the Bank.
[.14] 12. While this ORDER is in effect, the Bank shall not declare or pay any cash dividends on its capital stock without the prior written approval of the Regional Director and the Commissioner.
[.15] 13. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER, (i) in conjunction with the Bank's next shareholder communication, and also (ii) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429 for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
[.16] 14. On the fifteenth day of the second month following the effective date of this ORDER, and on the fifteenth day of every third month thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making further reports.
The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns,
{{5-31-91 p.C-349}}and other institution-affiliated parties of the Bank.
This ORDER shall become effective 10 days from the date of its issuance.
The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
Pursuant to delegated authority.
Dated: April 27, 1990
