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UNITED STATES OF AMERICA BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. AND STATE OF GEORGIA DEPARTMENT OF BqNKING AND FINANCE ATLANTA, GEORGIA Written Agreement by and among ADAIRSVILLE BANCSHARES, Adairsville, Georgia BANK OF ADAIRSVILLE Adairsville, Georgia FEDERAL RESERVE BANK OF ATLANTA Atlanta, Georgia BANKING COMMISSIONER THE STATE OF GEORGIA Atlanta, Georgia OF INC. ) ) 1 1 ) ) ) ) ) ) ) ) ) ) ) ) Docket Nos. 98-03 I-WA/RB-HC 98-03 I-W/JRB-SM WHEREAS, in recognition of their common goal to restore and maintain the financial soundness of Adairsville Banschares, Inc., Adairsville, Georgia (“Bancshares”), a registered bank holding company, and the Bank of Adairsville, Adairsville, Georgia (the “Bank”), a State chartered bank that is a member of the Federal Reserve System, and to help ensure the Year 2000 readiness of the Bank, Bancshares, the Bank, the Federal Reserve Bank of Atlanta (the “Reserve Bank”) and the Banking Commissioner State of Georgia (the “Commissioner”) Agreement of the have mutually agreed to enter into this Written (the “Agreement”); WHEREAS, this Agreement is being executed in accordance with the Rules Regarding Delegation of Authority of the Board of Governors of the Federal Reserve System (the “Board of Governors”), specifically 12 C.F.R. 265.11 (a)( 15), and the Reserve Bank has received the prior approval of the Director of the Division of Banking Supervision and Regulation (the “Director”) and the General Counsel of the Board of Governors to enter into this Agreement with Bancshares and the Bank; and WHEREAS, on &ce w\k and the Bank, at duly constituted 1Q, 1998, the boards of directors of Bancshares meetings adopted resolutions authorizing and directing, William B. Hurley, president and chief executive officer of Bancshares, and Ernest M. Acree, Jr., vice-chairman of the Bank, to enter into this Agreement on behalf of Bancshares and the Bank, respectively, and consented to compliance by Bancshares and the Bank and their institution-affiliated parties, as defined by sections 3(u) and 8(b)(3) of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1813(u) and (b)(3)) (the “FDI Act”), with each and every provision of this Agreement. NOW, THEREFORE, before the taking of any testimony or adjudication finding on any issue of fact or law herein, and without this Agreement constituting admission of any allegation made or implied by the Board of Governors or the 2 of or an Commissioner, Bancshares, the Bank, the Reserve Bank, and the Commissioner agree as follows: 1. Management Review (a) Within 45 days of this Agreement, the Bank’s board of directors shall engage an outside consultant, acceptable to the Reserve Bank and the Commissioner, an independent review of the functions and performance prepare a written report of findings and recommendations directors. to conduct of the officers of the Bank, and to the Bank’s board of The review shall focus on an assessment of the duties performed by each officer and the ability of each officer to perform competently his or her assigned duties. The primary purpose of this review shall be to aid in the development structure that is suitable to the Bank’s needs and is adequately trained personnel. At a minimum, the qualifications of a management staffed by qualified and of management shall be assessed for its ability to (1) restore and maintain all aspects of the Bank to a safe and sound condition, and (2) comply with the requirements of this Agreement. A copy of the consultant’s written report shall also be forwarded to the Reserve Bank and the Commissioner. (b) Within 30 days of the Bank’s receipt of the consultant’s findings and recommendations written management required by paragraph management l(a) hereof, the Bank shall submit a plan to the Reserve Bank and the Commissioner actions that the board of directors written report of describing specific proposes to take in order to strengthen the Bank’s and to improve the board of directors’ supervision over the Bank’s officers. The management plan shall fklly address the consultant’s and include detailed descriptions of the responsibilities findings and recommendations of each officer of the Bank, including reporting lines of authority and the responsibilities 2. Dividends/Management Fees/Consulting of subordinates. Fees (a) Bancshares and the Bank shall not declare or pay any dividends without the prior written approval of the Reserve Bank, the Commissioner, and the Director. (b) The Bank shall not pay to Bancshares any fee or fees that represent service or management fees of any nature without the prior written approval of the Reserve Bank and the Commissioner. (c) Bancshares and the Bank shall not pay any salaries, management or consulting fees to, or increase the directors’ fees of, any director of Bancshares or the Bank without the prior written approval of the Reserve Bank and the Commissioner. (d) Any request for prior approval shall be accompanied adequate to provide the Reserve Bank and the Commissioner by documentation with the details of each fee proposed to be paid by Bancshares or the Bank and a description of the benefits proposed to be derived by the payment of the fee, the type of services to be rendered, and the identity of the person or entity who will supply the services or advice covered by the fee. 4 3. Capital Adequacy Within 60 days of this Agreement, Reserve Bank and the Commissioner Bancshares and the Bank shall submit to the an acceptable joint written plan to achieve and maintain sufficient capital at the Bank. The plan shall, at a minimum, consider: (a) the Bank’s current and future capital requirements, address and including compliance with the Capital Adequacy Guidelines of the Board of Governors (12 C.F.R. Part 208, App. A and B); (b) any planned growth in the Bank’s assets; (c) the volume of the Bank’s adversely classified assets; (d) the Bank’s anticipated level of retained earnings; and (e) the source and timing of additional funds to fulfill the future capital needs of the Bank. 4. Compliance with Applicable Laws and Regulations Within 30 days of this Agreement, Bancshares shall submit to the Reserve Bank and the Commissioner an acceptable written plan to correct its violation of section 4(c)(a)(2) of the Bank Holding Company Act, as amended (12 U.S.C. an d 18WWN, section 225.21 of Regulation Y of the Board of Governors (12 C.F.R. 225.2 1) relating to Bancshares’s ownership of commercial property. Bancshares shall submit monthly progress reports to the Reserve Bank and Commissioner until the property is divested. 5. Liquidity Within 90 days of this Agreement, the Bank shall submit to the Reserve Bank and the Commissioner an acceptable written liquidity policy that shall, at a minimum, address, consider, and include the following: (b) a maximum level of volatile liabilities; (d) an appropriate (a) a minimum (c) an appropriate level of temporary assets; level of core deposits; level of loans relative to deposits and capital; balance sheet risk; (f) the number and amount of large deposits; borrowing availability; (e) parameters for off(g) the Bank’s and (h) appropriate standards for volume, mix and maturity of the Bank’s loans, investments, and deposits. 6. Market Risk Within 60 days of this Agreement, the Commissioner an acceptable written revised sensitivity to market risk policy that shall, at a minimum, (a) appropriate the Bank shall submit to the Reserve Bank and include the following parameters for interest rate risk: guidelines for “GAP” management; control the vulnerability (b) an adequate system to model and of net interest income to changes in interest rates; and (c) appropriate parameters governing the economic risk to the Bank’s capital due to changes in interest rates. 7. Loan Policy Revision Within 90 days of this Agreement, the Commissioner an acceptable revised written loan policy that shall, at a minimum, include the following: (a) the board of directors’ annual review of the loan policy; (b) the duties, responsibilities, (c) a requirement the Bank shall submit to the Reserve Bank and and procedures that bank management’s for the Bank’s loan committee; valuations of real estate held as collateral and real estate appraisals be at “fair value” estimates; (d) the board of directors’ annual adoption of a list of approved real estate appraisal firms; (e) the board of directors’ annual approval of lending authorities; requirements guidelines; requirements (f) minimum standards and methods and for verifying borrowers’ income and assets; (g) credit memorandum (h) underwriting guidelines for construction for other real estate properties; loans; (i) documentation (j) monthly charge-offs of identified loan losses; (k) monthly reporting of delinquent loans to the board of directors; (1) monthly presentation of the internal loan “watch report” to the board of directors ; and (m) monthly reporting of the adequacy of the allowance for loan and lease losses to the board of directors. 8. Asset Quality The Bank shall not, directly or indirectly, (a) extend any additional credit to or for the benefit of any borrower, including any related interest of the borrower, who is obligated in any manner to the Bank on any extension of credit or portion thereof that has been charged off by the Bank or classified “Loss” in the Report of Examination of the Bank, dated July 20, 1998 (the “Report of Examination”) uncollected; as long as such credit remains and (b) extend any additional credit to any borrower whose line of credit has been classified “Doubtful” or “Substandard” in the Report of Examination, without the prior approval of the Bank’s board of directors, who shall document the reasons for the additional advances, specifically certifying that (1) the additional extension of credit is necessary to protect the Bank’s interest in the ultimate collection of the credit already granted, or (2) the additional credit is in full compliance with the Bank’s written loan policy and is adequately secured, a thorough credit analysis has been performed indicating that the additional extension of credit is reasonable and justified, a senior officer has been appointed to ensure that all necessary loan documentation has been properly and accurately prepared and filed, the additional extension of credit will not impair the Bank’s interest in obtaining repayment of the already outstanding credit, and the board of directors reasonably believes that the additional extension of credit will be repaid according to its terms. This written certification, and related information together with the credit analysis that was used in the determination, Bank for subsequent supervisory shall be maintained by the review. 9. Problem Credits Within 90 days of this Agreement, Commissioner the Bank shall submit to the Reserve Bank and an acceptable written plan to improve the Bank’s position on each loan in excess of $50,000 that was in default as to principal or interest in excess of 90 days as of the date of this Agreement and each asset in excess of $50,000, including other real estate, adversely classified by examiners in the Report of Examination, amortization, repayment, be appropriate. liquidation, additional collateral or other means, whichever may The plan shall not be amended or rescinded without the prior written approval of the Reserve Bank and Commissioner, periodically through except that the plan shall be amended to cover loans or other assets in excess of $50,000 that are adversely classified or listed for special mention in subsequent examinations of the Bank or, with respect to loans, in default as to principal or interest in excess of 90 days as to the date of each subsequent examination or visitation. Amended plans based on loans or other assets that are classified or listed for special mention or overdue in subsequent examinations 8 or T visitations shall be submitted to the Reserve Bank and the Commissioner with the next progress report, described in paragraph 20 hereof, following each subsequent examination or visitation. 10. Loan Documentation (a) Within 60 days of this Agreement, the Bank shall take all necessary steps to correct all exceptions to the Bank’s loan files reflected in the loans adversely classified and the loans listed for technical exceptions in the Report of Examination, including obtaining accurate and current financial statements, updating insurance coverage, and obtaining income/cash flow information. needed documentation or credit information, the information, In all cases where the Bank is unable to obtain it shall document the actions taken to secure the reason the information could not be obtained, and shall maintain such documentation in the appropriate credit file for subsequent supervisory review. ‘(b) Within 90 days of this Agreement, the Bank shall submit to the Reserve Bank and the Commissioner loan documentation acceptable written procedures to identify, monitor, and correct deficiencies. (c) Within 90 days of this Agreement, the Bank shall submit to the Reserve Bank and the Commissioner a written report detailing the actions taken pursuant to paragraph 1O(a) hereof. 9 11. Allowance for Loan and Lease Losses (a) Within 10 days of this Agreement, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss” in the Report of Examination that have not been previously collected in full or charged-off. (b) The Bank shall continue to maintain, through charges to current operating income, an adequate allowance for loan and lease losses (the “ALLL”). The adequacy of the ALLL shall be determined in light of the current level of nonperforming current level of concentrations of credit within the loan portfolio of the Bank, past loss experience, loans, the evaluation of the potential losses in the loan portfolio of the Bank, especially the potential for unidentified losses in loans adversely classified, current economic conditions and examiners’ criticisms or other comments recent report of examination, on the Allowance and the requirements contained in the Bank’s most of the Interagency Policy Statement for Loan and Lease Losses, dated December 21, 1993. A written record shall be maintained indicating the methodology used in determining the amount of the ALLL needed. 12. Loan Review (a) Within 60 days of this Agreement, the Bank shall complete a review of the loan portfolio and assign credit risk grades to all loans reviewed. At a minimum, the review shall include all loans $25,000 or greater, past due loans, nonaccrual loans, bankruptcies, and all loans adversely classified or listed for special mention in the Reports of Examination. Quarterly portfolio reviews shall be conducted thereafter. IO A summary of the results of each loan review shall be submitted to the Bank’s board of directors, the Reserve Bank, and the Commissioner within 30 days after each review is completed. (b) The board of directors shall take all actions necessary to ensure the Bank’s compliance with its established written loan review policy and procedures and shall not amend such policy and procedures without the prior written approval of the Reserve Bank and the Commissioner. 13. Internal Audit (a) Within 60 days of this Agreement, and the Commissioner, shall, at a minimum, the Bank shall submit to the Reserve Bank an acceptable written internal audit policy and procedures that address, consider, and include the following: (1) Procedures for the periodic assessment of the adequacy of internal controls and compliance with the Bank’s policies, procedures, and applicable laws and regulations for each audit area; (2) the establishment of an audit schedule to ensure that all areas of the Bank’s balance sheet are audited at least yearly; II (3) procedures for management to review audit reports quarterly, respond in writing to criticisms in the audit report, and implement corrective actions that are responsive to the audit findings; and (4) the submission to the board of directors of the quarterly audit reports and management responses. (b) Within 30 days of receipt by the board of directors, the Bank shall submit to the Reserve Bank and the Commissioner copies of the reports and responses described in paragraph 13(a)(4) hereof. 14. Investment Policy Revision Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and the Commissioner minimum, an acceptable revised investment include the following: (a) identification policy and procedures that shall, at a of types of permissible investments; (b) identification of desired maturities for each type of permissible (c) requirements for credit information and analysis before purchase; and (d) procedures for reporting investment activity and policy exceptions investment; to the board of directors. 15. Strategic Plan and Budget (a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and the Commissioner of directors, concerning a written strategic plan and budget, approved by the Bank’s board the Bank’s proposed business activities for 1999. This plan shall 12 contain provisions that address the requirements of this Agreement, and, at a minimum, include: (1) financial performance objectives, including plans for asset growth, earnings, liquidity and capital, supported by detailed, quarterly pro forma financial statements; (2) management, lending and operational objectives, condition of the Bank as reflected in the Report of Examination, appropriate to the and the specific strategies for achieving such objectives; (3) identification of the major areas in and the means by which the Bank will seek to improve its operational performance; (4) written assumptions and that form the basis for budget projections. (b) A written strategic plan and budget for each calendar year after 1999 shall be submitted to the Reserve Bank and to the Commissioner at least one month prior to the beginning of that calendar year. 16. Year 2000 Program The Bank shall take the following actions to ensure that its internal and external mission-critical systems are Year 2000 compliant: 13 I . (a) Within 10 days of this Agreement, Reserve Bank and the Commissioner be responsible for supervising appoint additional appoint a senior manager, acceptable to the and accountable to the board of directors, who will the Bank’s Year 2000 readiness efforts and who will staffnecessary that will devote a substantial amount of time to Year 2000 compliance; (b) With 10 days of this Agreement, the Bank shah retain an independent consultant acceptable to the Reserve Bank and the Commissioner complying with the requirements to assist the Bank in of this paragraph. (c) within 10 days of this Agreement, identify and allocate financial and other resources necessary to achieve Year 2000 compliance; (d) within 20 days of this Agreement, internal mission-critical systems; (e) within 30 days of this Agreement, Commissioner submit to the Reserve Bank and the an acceptable plan for the renovation (f) within 30 days of this Agreement, Commissioner complete a written assessment of all of external mission-critical systems; submit to the Reserve Bank and the acceptable written test plans for all renovated or modified internal and external mission-critical systems; and 14 (g) within 45 days of this Agreement, identify customers, including funds takers and funds providers, that represent material risk to the Bank, evaluate their Year 2000 preparedness, assess their existing and potential Year 2000 risk to the Bank, and implement appropriate risk controls, including controls for underwriting risk, to manage and mitigate their Year 2000 risk to the Bank. 17. Year 2000 Business Resumption Contingency (a) Within 10 days of this Agreement, Program the Bank shall designate a senior manager, acceptable to the Reserve Bank and the Commissioner and accountable to the board of directors, who will be responsible for supervising the Bank’s Year 2000 business resumption contingency planning process. (b) Within 30 days of this Agreement, the Bank shall submit to the Reserve Bank and the Commissioner business resumption an acceptable written program for the development contingency of a Year 2000 plan to mitigate operational risks that may be caused by failures of the Banks core business processes. The program shall, at a minimum, include and address the following four phases of the Bank’s business resumption contingency planning process and provide for the periodic update of the plan as needs and circumstances require: (1) The establishment of organizational the Bank’s business continuity planning strategy; planning guidelines that define (2) the development impact of mission-critical system failures on the Bank’s core business processes; (3) the identification business resumption of a business impact analysis to assess the potential contingency of circumstances and trigger dates under which the plan will be activated; and (4) the establishment of a method of validating the plan for effectiveness and viability. (c) The business impact analysis described in paragraph 17(b)(2) hereof must be completed within 60 days of this Agreement. 18. Approval of, and Compliance with, Submissions (a) The plans, policies, procedures, and program required by paragraphs 3, 5,6, 7, 9,10(b), 13(a), 14,16(e) and (f), and 17 hereof shall be submitted to the Reserve Bank and the Commissioner Commissioner for review and approval. may comment on the plans, policies, procedures, and program. Acceptable plans, policies, procedures, and an acceptable program shall be submitted to the Reserve Bank and the Commissioner Agreement, unreasonably The Reserve Bank and the within the time periods set forth in this and the approval of the Reserve Bank and the Commissioner withheld. shah not be Where applicable, Bancshares and the Bank shall adopt all approved plans, policies, procedures, and the program within 10 days of written approval by the Reserve Bank and the Commissioner and then shall fully comply with them. 16 During the term of this Agreement, where applicable, Bancshares and the Bank shall not amend or rescind the approved plans, policies, procedures, and program without the prior written approval of the Reserve Bank and the Commissioner. (b) The Bank’s board of directors shall review all plans, policies, procedures, and the program annually, and review compliance with all plans, policies, procedures and the program quarterly. 19. Board of Directors’ Packages Within 5 days following each meeting of the board of directors, the Bank shall submit a complete board package including minutes of board committees to the Reserve Bank and the Commissioner. 20. Quarterly Reports Within 30 days of the end of each calendar quarter (December 3 1, March 3 1, June 30, and September 30) following the date of this Agreement, Bank shall furnish to the Reserve Bank and the Commissioner Bancshares and the written progress reports detailing the form and manner of all actions taken to ensure compliance with this Agreement and the results thereof. Each director of Bancshares and the Bank shall certify in writing to the Reserve Bank and Commissioner that he or she has reviewed each quarterly progress report required by this paragraph. Such reports may be discontinued have been accomplished, when corrections required by this Agreement 17 and I . the Reserve Bank and the Commissioner have, in writing, released Bancshares and the Bank from making further reports. 21. Communications All communications regarding this agreement shall be sent to: (a> Mr. Marion P. Rivers, III Assistant Vice President Federal Reserve Bank of Atlanta 104 Marietta Street, NW Atlanta Georgia 30303-2713 W Mr. Steve D. Bridges State Banking Commissioner Department of Banking and Finance State of Georgia 2990 Brandywine Road Suite 200 Atlanta, Georgia 30341 (cl Mr. William B. Hurley President and Chief Executive Officer Adairsville Bancshares, Inc. Post Office Box 405 Adairsville, Georgia 30 103 (4 Mr. Ernest M. Acree, Jr. Vice Chairman Bank of Adairsville Post Office Box 39 Dalton, Georgia 30722 Miscellaneous 22. Notwithstanding and the Commissioner any provision of this Agreement to the contrary, the Reserve Bank may, in their sole discretion, grant written extensions of time to Bancshares and the Bank to comply with any provision of this Agreement. 18 23. The provisions of this Agreement shall be binding upon Bancshares and the Bank and all of their institution-affiliated parties, in their capacities as such, and their successors and assigns. 24. Each provision of this Agreement shall remain effective and enforceable until stayed, modified, terminated or suspended by the Reserve Bank and the Commissioner. 25. The provisions of this Agreement shall not bar, estop, or otherwise prevent the Board of Governors or the Commissioner from taking any other action affecting Bancshares and the Bank or any of its current or former institution-affiliated parties and their successors and assigns 26. This Agreement is a “Written Agreement” for the purposes of section 8 of the FDI Act (12 U.S.C. 1818). IN WITNESS WHEREOF, the parties have caused this Agreement to be executed asofthe /?day of , 1998. Federal Reserve Bank of Atlanta Adairsville Bancshares, Inc. By: I Banking Commissioner State of.,Georgia Bank of Adairsville 19 i The undersigned directors of Bancshares and the Bank individually acknowledge reading the foregoing Agreement and approve of the consent thereto by Bancshares and the Bank. 20