Chicago-based Highland Community Bank received a cease and desist order earlier this month from federal and state regulators that charges the company with engaging in unsafe and unsound banking practices. The order also suspends the bank’s authority to pay cash dividends or increase assets without regulator permission.
The order, which was issued by the Illinois Department of Financial and Professional Regulation and the Federal Deposit Insurance Corp., accuses the bank of being lax in collecting loan repayments, operating with inadequate levels of capital protection and liquidity, and accruing an excessive level of delinquent loans. Highland accrued $107,976 of liabilities in the first six months of 2009 compared with $99,903 in the same period of 2008.
Highland (No. 18 on the B.E. Banks list with $111.7 million in assets) must now follow the regulators’ strict guidelines in order to avoid penalties.
“If the regulators think there is a risk of loss to the insurance fund [or to depositors] – for instance if your capital levels get too low, your losses get too high, or if you are involved in very risky businesses — then they are going to force a cease and desist,” says Broadway Federal Bank CEO and chairman Paul Hudson who is speaking in general about cease and desist orders.
Highland, which runs three branches on the South Side of Chicago, saw earnings fall from $238,000 in the first half of 2008 to $147,000 in the same period in 2009. The stipulations of the order cap total asset growth to no more than 3% during any three-month period without regulator consent.
The order requires the bank to immediately maintain its capital ratio (the ratio of qualifying total capital to risk-weighted assets) at a minimum of 10%.
The FDIC has established a timetable for the bank to comply with stipulations in the decree.
Highland Community has 30 days from the Sept. 15 date of the decree to increase its allowance of loan and lease losses; write a plan to increase liquidity; and create a plan to increase profits that includes a comprehensive budget for 2009 and 2010 and a review process.
Within 60 days of the order, the bank will need to write a plan to reduce its risk of liability to the FDIC. The plan may require the bank collect, charge off, or sell assets that are more than 90 days delinquent and in excess of $250,000 or on assets in which recoupment is doubtful.
However, complying with a cease and desist order that requires an increase in capital can be difficult for a bank because it can be hard to get a loan or get investors, says Hudson.
Some banks with cease and desist orders have opened a line of credit from a Federal Home Loan Bank, increased deposits, or slowed down on lending to build up cash, says Hudson.
Highland Bank executives did not return phone calls for comment.