First National Bank of Shelby County will have to make substantial changes to come into compliance with the demands of the federal government.

The Office of the Comptroller of the Currency and members of the bank’s board of directors signed an agreement last week setting forth certain requirements that, if met, would allow the bank to stay in operation.

The OCC charged the bank &uot;with violations of law, rule or regulation, with unsafe or unsound banking practices&uot; and with failure to comply with a former agreement in which board members agreed to certain oversight measures.

The agreement calls for the bank to form a compliance committee to meet at least monthly and ensure the bank and its officials follow the OCC’s order. Members of the committee must not currently be involved with the bank in any way.

The bank’s board must also develop a three-year strategic plan that will establish the accountability OCC officials felt was lacking.

Efforts to reach bank officials were unsuccessful.

The bank’s board must also create and adhere to a written profit plan to improve and sustain the bank’s earnings, as well as a viable capital plan.

According to the agreement, if the bank fails to submit or adhere to an acceptable capital plan, the board must then present a proposal to sell or merge the bank.

Many of the charges of the OCC related to mismanagement of the bank.

According to the agreement, the bank’s board is required to &uot;identify a new, proper management structure and necessary senior management positions.&uot;

In conjunction with this requirement, the board must identify the skills and expertise needed by its senior management officials, then assess the experience, qualifications and performance of each incumbent senior management officer.

Current senior officers include William T. Harrison, chief executive officer and chairman of the board; Helen H. Phillips, president; and Carol H. Smith, senior vice president and marketing director.

All new hires for senior management positions must be approved by the OCC director, according to the agreement.

Another personnel aspect that was troubling to the OCC regulators was compensation.

According to the OCC charges, &uot;Compensation paid to Chairman and CEO Harrison, President Phillips and Senior Vice President Smith is excessive. The compensation paid to these insiders is approximately 185 percent of the compensation paid to officers of peer institutions.&uot;

The agreement signed by board members indicates that within 90 days, the bank will develop specific timeframes to reduce total compensation including salaries, bonuses, fees, expenses and other benefits.

Other charges of the OCC involved conflicts of interest with Harrison family members.

Those conflicts of interests included alleged improper loans and improper payments for services provided by those family members.

In addition, the agreement states that no loans or credit extensions should be made to Harrison, Phillips or Smith.

Other facets of the agreement include

* Changes in the bank’s overdraft policy.

* Changes in the bank’s management of loan portfolios and lending policies.

* Implementation of a loan review system.

* Proper collateral documentation maintenance.

* An independent, internal audit program.

* Internal controls on loan officers.

* A process to approve expense payments or reimbursements to bank officers as well as to monitor the validity of charges on bank credit cards, especially those issued to executive officers.

Members of the bank’s board including Hewitt L. Conwill, Martha B. Ferguson, Thomas J. Parliament, Joe L. Tidmore, Harrison, Phillips and Smith signed the agreement on May 16.

Troubles are just beginning

Signing and adhering to the agreement may not bring an end to the troubles of the bank, however.

Shareholder Fred Phillips of Alabaster filed a lawsuit in Shelby County Circuit Court this month against the bank and its board members.

&uot;Next to the Harrisons, I’m the third largest stockholder (in the bank) and I see the quality of the bank going down,&uot; Phillips said.

In the lawsuit, Phillips charges, &uot;We believe there has been and continues to this day, a systematic discrimination on the part of the majority shareholders toward the minority shareholders.&uot;

Phillips contends that members of the Harrison family have such a controlling interest in the bank’s activities that &uot;directors and officers … serve at the total whim and fancy of the Harrison family and are unable or unwilling to exercise any direction and control over the majority shareholders.&uot;

According to the lawsuit filed by Phillips, a lawsuit he seeks to take to class-action status, &uot;Allowing the bank’s condition to deteriorate to the extent that the bank’s primary federal regulator was forced to file a ‘Notice of Charges for an Order to Cease and Desist’ constitutes a complete and utterly inexcusable lack of attention by the directors of the bank and CBI to the duties of their office.&uot;

Specifically he charges that Harrison family members paid &uot;excessive compensation to themselves; have illegally and improperly funneled money to themselves; have improperly used bank assets such as credit cards and vehicles&uot; and &uot;have coerced bank employees to engage in illegal actions.&uot;

Through a jury trial, Phillips is seeking compensatory and punitive damages as well as restitution for what he refers to as &uot;misappropriated funds.