Federal Deposit
Insurance Corporation

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   [¶11,116] In the Matter of American City Bank of Tullahoma, Tullahoma, Tennessee, Docket No. FDIC-95-2b (1-11-95).

   Bank to cease and desist from such unsafe or unsound practices as engaging in hazardous lending practices; operating with an excessive level of poor quality assets; operating without adequate reserve for loan losses; operating with inadequate liquidity; operating without proper internal routine and controls; operating in violation of applicable laws or regulations; operating with management whose policies are detrimental to the Bank; and failing to provide adequate supervision over the Bank's affairs.

   [.1] Management—Management Report—Outside Consultant Required
   [.2] Management—Qualifications—Review
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Loan Loss Reserve—Establish/Maintain
   [.5] Ethics—Written Policy Required
   [.6] Assets—Adversely Classified—Eliminate/Reduce
   [.7] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.8] Loans—Concentrations of Credit—Reduction Plan
   [.9] Loan Policy—Written Revision—Minimum Requirements
   [.10] Loan Portfolio—Review and Grading System Required
   [.11] Mortgage Department—Audit and Management Reform
   [.12] Compensation—Specific Officer—Audit Required
   [.13] Violations of Law—Eliminate/Correct
   [.14] Liquidity and Funds Management—Policy Required
   [.15] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.16] Reports of Condition and Income—Amendment Required
   [.17] Dividends—Restricted
   [.18] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

AMERICAN CITY BANK OF
TULLAHOMA
TULLAHOMA,TENNESSEE
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-95-2b
   American City Bank of Tullahoma, Tullahoma, Tennessee ("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 December 9, 1994, 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:

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   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:
   (a) engaging in hazardous lending practices;
   (b) operating with a large volume of poor quality loans;
   (c) operating with an inadequate loan valuation reserve;
   (d) operating with inadequate provisions for liquidity;
   (e) operating with inadequate internal routine and controls policies;
   (f) operating in violation of sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. §§ 371c and 371c-1, made applicable to state nonmember banks by section 18(j)(1) of the Act, 12 U.S.C. § 1828(j)(1); section 22(h) of the Federal Reserve Act, as amended, 12 U.S.C. § 375b, and sections 215.4(a), 215.4(c), 215.4(d), 215.5(a), 215.5(c), 215.5(d), 215.8, and 215.11 of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.4(a), 215.4(c), 215.4(d), 215.5(a), 215.5(c), 215.5(d), 215.8, and 215.11, made applicable to state nonmember banks by section 18(j)(2), 12 U.S.C. § 1828(j)(2); section 206.3(a) of Regulation F of the Board of Governors of the Federal Reserve Board, 12 C.F.R. § 206.3(a); Parts 403 and 450 of the Government Securities Act of 1986, 17 C.F.R. §§ 403 and 450; Parts 303, 323, 337, 350, 353, 362 and 365 of the FDIC Rules and Regulations, 12 C.F.R. Parts 303, 323, 337, 350, 353, 362 and 365; and Sections 45-2-1102, 45-2-1103 and 45-2-1705 of the Tennessee Code Annotated;
   (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 fails 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) Within 60 days of the effective date of this ORDER, the board of directors shall review and make a written report ("Management Report") on the Bank's management needs in the lending area. The Management Report shall incorporate an analysis of the Bank's management and staffing requirements and shall, at a minimum:

   (i) Identify both the number and type of positions needed to properly supervise the Bank's lending functions, giving appropriate consideration to the Bank's loan volume, customer base and the number of problem credits.
   (ii) Provide a clear and concise description of the general duties and responsibilities for lending officers and their support staff.
   (iii) Identify the skills, experience and pay required for each position.
   (iv) Provide an evaluation of the Bank's senior management and lending officials, indicating whether bank officials possess the necessary lending and collection experience and qualifications required to adequately perform present and anticipated duties.
   (v) Establish a plan to recruit, hire and/or replace personnel based on ability and experience.
   (vi) Establish a plan providing for periodic evaluation of each individual's job performance.
   (vii) Provide for periodic review of Bank's management and updating of lending policies and procedures.

{{3-31-95 p.C-3903}}a written plan of implementation ("Plan") addressing the findings of the Management Report. The plan shall specify the actions to be taken by the board of directors and the time frames for each action.
   (d) Within 90 days of the date in which the Regional Director and the Commissioner approved the outside consultant(s), the board of directors shall prepare a written report ("Written Report") which shall (1) contain a recitation identifying the recommendations made by the outside consultant(s) which have been incorporated in the Management Report and Plan, (2) a recitation identifying the recommendations made by the outside consultant(s) which were not incorporated in the Management Report and Plan and the reasons for not including such recommendation, and (3) a copy of any report(s) prepared by the outside consultant(s).
   (e) A copy of the Management Report, Plan, and Written Report 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 Report and Plan of implementation which approval shall be recorded in the minutes of the meeting of the board of directors. It shall remain the responsibility of the board to fully implement the plan within the specified time frames. In the event the Plan, or any portion thereof, is not implemented, the board shall immediately advise the Regional Director and the Commissioner, in writing, of specific reasons for deviating from the Plan.

[.2] 2. (a) During the life of this ORDER, the Bank shall have management qualified to restore the Bank to a sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible for supervising the Bank's overall lending function.
   (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 and the 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) within 15 days of the event.
   (ii) The Bank shall comply with section 32 of the Act, 12 U.S.C. § 1831i.
   (d) (i) Within 120 days of the effective date of this ORDER, the board of directors shall prepare and forward, to each shareholder of the Bank, a list of potential candidates for nomination to the Bank's board of directors at the next meeting of shareholders of the Bank at which directors are to be elected. The list of candidates shall include individuals who are independent with respect to the Bank, in such number that, if elected, would cause a majority of the board of directors to be comprised of outside directors as defined herein. The actions taken in identifying potential candidates, including any communication with such individuals, shall be documented and made part of the minutes of the board of directors. Copies of these board minutes shall be provided to the Regional Director and Commissioner within 120 days from the effective date of this ORDER.
   (ii) At the next meeting of the shareholders of the Bank, at which directors of the Bank are to be elected, and at each succeeding meeting of the shareholders at which directors are to be elected, the members of the board of directors who are also shareholders shall nominate and support the election of candidates to the board of directors who are independent with respect to the Bank and who have agreed to stand for election to the board of directors, in such number as is necessary to cause a majority of the board of directors to be and to remain comprised of outside directors.

   (e) Within 30 days of the effective date of this ORDER, the board of directors shall establish a committee of the board of

directors with the responsibility to ensure that the Bank complies with the provisions of this ORDER. At least two-thirds of the members of such committee shall be independent, outside directors as defined herein. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.
   (f) For the purposes of this ORDER, an "outside director" shall be an individual:

   (i) Who shall not be employed, in any capacity, by the 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 equity capital and reserves;
   (iv) Who shall not be related to any directors, principal shareholders of the Bank or affiliates of the Bank; and
   (v) Who shall be a resident of, or engage in business in, the Bank's trade area.

   (i) The sale of news 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) Any other method acceptable to the FDIC.

[.4] 4. (a) Within 30 days of the effective date of this Order, the Bank shall establish and shall thereafter maintain, through charges to current operating income, an adequate valuation reserve for loan and lease losses. In determining the adequacy of the valuation reserve for loan and lease losses, the board of directors of the Bank shall at a minimum consider the following:

   (i) Prevailing instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions-Consolidated Reports of Condition and Income";
   (ii) The volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as an analysis of net charge-offs experienced on previously adversely classified loans;
   (iii) The extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of risk associated with such loans;
   (iv) The trend in loan growth, including any rapid increase in loan volume within a relatively short time period;
   (v) General and local economic conditions affecting the collectibility of the bank's loans;
   (vi) Previous loan loss experience by loan type, including the trend of net charge-offs as a percent of average loans over the past several years;
   (vii) Off balance sheet credit risks;
   (viii) The overall risk associated with each concentration of credit together with the degree of risk associated with each related individual borrower; and
   (ix) Any other factors appropriate in determining future valuation reserves.

   (b) Prior to the submission of any Report of Condition or Report of Income, the board of directors of the Bank shall review the adequacy of the Bank's valuation reserve for loan and lease losses. The minutes of the board meetings at which each review is undertaken shall indicate the results of the review, the amount of any increase to the reserve, and the basis for the amount of the valuation reserve. The criteria for the review shall be as set forth in Paragraph 4(a).

   (i) Participating in any manner in any transaction or loan in which the individual, his spouse, child, partner, or organization is involved; or in which the individual serves as an officer, director, trustee, partner, or employee, or has a financial interest;
   (ii) Purchasing of Bank property;
   (iii) Providing goods or services to the Bank; and
   (iv) Outside employment and other activities.

{{3-31-95 p.C-3906}}with the Ethics Program and report his findings to the board of directors.

[.6] 6. (a) Within 10 days of the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of May 6, 1994, 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 of the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" as of May 6, 1994, to not more than $3,000,000.
   (c) Within 120 days of the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" as of May 6, 1994, to not more than $2,500,000.
   (d) Within 270 days of the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" as of May 6, 1994, to not more than $2,000,000.
   (e) Within 360 days of the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" as of May 6, 1994, to not more than $1,500,000.
   (f) The requirements of Paragraphs 6(a), 6(b), 6(c), 6(d), and 6(e) are not to be construed as standards for future operations and, in addition to the foregoing, the Bank shall eventually reduce the total of all adversely classified assets. As used in Paragraphs 6(b), 6(c), 6(d), and 6(e) the word "reduce" means (i) to collect, (ii) to charge-off, or (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC or the Tennessee Department of Financial Institutions.

[.7] 7. (a) Beginning with the effective date of this ORDER, the Bank shall not make any further extension of credit to any borrower whose loans are charged off, in whole or in part, or are adversely classified "Loss" as of May 6, 1994, and remain uncollected.
   (b) Beginning with the effective date of this ORDER, the Bank shall not make any further extension of credit to any borrower thereof whose loans in the aggregate exceed $200,000 and are adversely classified "Substandard" as of May 6, 1994, unless such extension has been approved by a majority of the Bank's board of directors in advance and the Bank's board of directors has detailed in the written minutes of the meeting how it has affirmatively determined all of the following: (i) That the extension of credit is in full compliance with the Bank's loan policy; (ii) that it is necessary to protect the Bank's interest or that the extension of credit is adequately secured; (iii) that based upon credit analysis the customer is deemed to be creditworthy; and (iv) that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title, and lien documents. The minutes shall also include the following information about the extension of credit: (i) The amount adversely classified as of May 6, 1994; (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 5(b).

   [.8] 8. Within 180 days of the effective date of this ORDER (unless within 60 days an alternative timetable or proposal is submitted by the Bank and approved in writing by the Regional Director and the Commissioner), (i) the Bank shall reduce each loan concentration as of May 6, 1994, to an amount which shall be less than 25 percent of the Bank's Tier I capital for each concentration of credit to an individual; and (ii) shall reduce each loan concentration as of May 6, 1994, to an amount which shall be less than 100 percent of the Bank's Tier I capital to each industry. In addition, the Bank shall not make any new extensions of credit, directly or indirectly, to any borrower whose

loans in the aggregate equal 25 percent or more of the Bank's Tier I capital.

   [.9] 9. Within 60 days of the effective date of this ORDER, the Bank shall review its written loan policy and make whatever changes may be necessary to provide for the safe and sound administration of all aspects of the lending function. Evidence of the review and establishment of procedures to ensure compliance with the loan policy shall be reduced to writing. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

[.10] 10. (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) The identification of 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, no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.

   (b) A copy of the reports submitted to the board, as well as documentation of the action taken by the Bank to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.

[.11] 11. (a) On the effective date of this ORDER, the Bank shall rescind that certain Mortgage Department Management Agreement ("Agreement") dated October 1, 1991, between the Bank and W. Sam Sawyer, regarding the operations of the Mortgage Department of the Bank.
   (b) Within 60 days of the effective date of this ORDER, the Bank shall obtain the services of an independent external auditor, acceptable to the Regional Director, both in terms of preparer and scope, to audit and determine the amount of profit and loss generated by the Mortgage Division of the Bank for each year of the Agreement using generally accepted accounting methods. The audit shall commence within 60 days of the date in which the Regional Director approves the independent external auditor.
   (c) Within 10 days after submission of the auditor's report to the Bank, the Bank shall submit a copy of said report to the Regional Director for the purpose of verifying the amount of loss suffered by the Mortgage Division of the Bank.
   (d) Within 30 days of notification by the Regional Director of the Regional Director's finding(s), the Bank shall take whatever action is necessary to obtain reimbursement from W. Sam Sawyer, pursuant to the Agreement, for the losses suffered by the Mortgage Division of the Bank.

[.12] 12. (a) Within 60 days from the effective date of this ORDER, the Bank shall obtain the services of an independent external auditor, acceptable to the Regional Director both in terms of preparer and scope, to determine if the total compensation (both current and deferred) and expenses paid to and/or on the behalf of W. Sam Sawyer in his capacities as chairman of the board and legal counsel for the Bank and to any of his related interests from January 1, 1991, to May 6, 1994, were reasonable in relation to the services provided to the Bank and whether the expenses are properly documented and authorized. For the purpose of this paragraph, "compensation" refers to any and all salaries, bonuses, and other benefits of every kind and nature whatsoever, whether paid

directly or indirectly. The audit shall commence within 60 days of the date in which the Regional Director approves the independent external auditor.
   (b) Within 30 days of the date in which the Regional Director approves the external auditor, the Bank shall have the auditor formulate a plan acceptable to the Regional Director which will be used by the auditor for determining the reasonableness of the compensation paid W. Sam Sawyer. The plan shall address, at a minimum in his capacity a chairman of the board:

   (i) Comparable salaries for similarly situated individuals in a bank located in the State of Tennessee of less than $90,000,000 in assets;
   (ii) The amount of documented time spent by him performing Bank business;
   (iii) The percentage of loans extended by him which fail to comply with the Bank's written loan policy;
   (iv) The amount of time spent by him on the Bank premises;
   (v) The Tennessee Bankers Association 1994 Salary Survey and any updates thereof;
   (vi) Any of his activities which are or result in a violation of any law, rule, regulation or loss to the Bank.
   (vii) Whether the compensation paid was approved by the Bank's board of directors and properly documented.

   (c) Within 30 days of the date in which the Regional Director approves the external auditor, the Bank shall have the auditor formulate a plan acceptable to the Regional Director which will be used by the auditor for determining the reasonableness of the compensation paid W. Sam Sawyer in his capacity as legal counsel for the Bank. The plan shall address, at a minimum, in his capacity as counsel for the Bank:

   (i) Comparable hourly fees for similarly situated attorneys in the local area;
   (ii) The amount of documented time spent by him performing legal services for the Bank;
   (iii) A review of all billings, invoices, time sheets or other written documentation supplied the Bank prior to payment;
   (iv) Any of his activities which are or result in a violation of any law, rule, regulation or loss to the Bank;
   (v) The amount of legal fees received by him as a result of the October 1, 1991 Agreement; and
   (vi) Whether the compensation paid was approved by the bank's board of directors and properly documented.

   (d) Within 75 days of the date in which the Regional Director approves the independent external auditor, the Bank shall take whatever action is necessary to obtain reimbursement for any of the expenses paid since January 1, 1991, to W. Sam Sawyer which expenses are determined by the auditor to lack proper documentation, authorization, or are not reasonable in relation to the services provided. Proper documentation shall be determined by the auditor using generally accepted accounting standards.

   [.14] 14. Within 60 days of the effective date of this ORDER, the Bank shall formulate and adopt a written liquidity and funds management policy. Such policy shall include the establishment of acceptable ranges of ratios in the following areas: volatile liability dependence, total loans to total deposits and temporary investments to volatile liabilities. In addition, the liquidity policy shall incorporate a funds management program which designates acceptable levels for: volatile liabilities, including borrowing; asset mix, including temporary funds and investments, long-term investment securities and classes of obligors, and loans to deposits; and rate-sensitive assets as a percent of rate-sensitive liabilities. The written liquidity and funds management policy shall be submitted to the Regional Director and the Commissioner for review and comment.

   [.15] 15. Within 60 days of the effective date of this ORDER, the Bank shall adopt and implement a written policy for the operation of the Bank in such a manner as to provide internal routine and controls consistent with safe and sound banking practices.

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   Such policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.16] 16. (a) Within 30 days of the effective date of this ORDER, the Bank shall review all Consolidated Reports of Condition and Income filed with the FDIC and the Tennessee Department of Financial Institutions on and after December 31, 1993, and shall amend and file with the FDIC amended Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the date of each such Report.
   (b) In addition to the above and during the life of this ORDER, the Bank shall file with the FDIC and the Tennessee Department of Financial Institutions Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the reporting period. In particular such Reports shall include any adjustment in the Bank's books made necessary or appropriate as a consequence of any State or FDIC examination of the Bank during that reporting period.

   [.18] 18. 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, Division of Supervision, Registration and Disclosure Unit, 550 17th Street, N.W., Room F-250, 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.
   19. On the fifteenth day of the second month following the effective date of this ORDER, and on the fifteenth day of every calendar quarter 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 and the Commissioner have released the Bank in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents successors, assigns, and other institution-affiliated parties 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.
   Dated: January 11, 1995.
   Pursuant to delegated authority.