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FDIC Enforcement Decisions and Orders

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   [10,283] In the Matter of Powder Mill Bank, Morris Plains, New Jersey, Docket No. FDIC-91-185b (7-24-91).

   Bank to cease and desist from such unsafe or unsound practices as failing to provide adequate supervision over the Bank's affairs; operating with an excessive level of poor quality assets; following hazardous lending and lax collection practices; extending credit which is inadequately secured and without sufficient documentation; operating with inadequate allowance for loan and lease losses; operating in such a manner as not to produce stable earnings; operating with inadequate capital; operating with inadequate liquidity; operating with inadequate routine and controls policies; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 8-14-92; see ¶15,507.)

   [.1] Management—Qualifications—Review
   [.2] Assets—Adversely Classified—Eliminate/Reduce
   [.3] Loan Loss Reserve—Establish/Maintain
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Assets—Problem Assets—Individual Written Plans—Review
   [.6] Loans—Overdue—Ratio—Reduce
   [.7] Lending and Collection Policy—Revision—Minimum Requirements
   [.8] Strategic Plan—Minimum Requirements
   [.9] Earnings—Comprehensive Plan Required
   [.10] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.11] Funds Management—Written Policy Required
   [.12] Audit—Internal—Minimum Standards
   [.13] Violations of Law—Eliminate/Correct
   [.14] Brokered Deposits—Report to FDIC Required
   [.15] Dividends—Restricted {{9-30-91 p.C-1207}}
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.18] Compliance Reports—Frequency

In the Matter of

POWDER MILL BANK
MORRIS PLAINS, NEW JERSEY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Powder Mill Bank, Morris Plains, New Jersey ("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 regulations alleged to have been committed by the Bank and of its right to a hearing on such alleged charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), 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 July 17, 1991, whereby, solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violation of law and 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. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST
   IT IS HEREBY ORDERED, that Powder Mill Bank, Morris Plains, New Jersey, its successors, assigns, directors, officers, employees, agents, and other institution-affiliated parties, as defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), CEASE AND DESIST from the following unsafe or unsound banking practices:
   (a) Operating the Bank without adequate supervision and direction of the operating management by the board of directors;
   (b) Operating the Bank with an excessive level of poor quality assets;
   (c) Operating the Bank with hazardous lending and lax collection practices;
   (d) Extending credit which is inadequately secured and without adequate and appropriate supporting documentation;
   (e) Operating the Bank without providing an adequate reserve for loan losses;
   (f) Operating the Bank in such a manner so as not to produce stable operating earnings;
   (g) Operating the Bank with capital which is inadequate in relation to the kind and quality of its assets;
   (h) Operating the Bank without adequate liquidity and proper regard for funds management;
   (i) Operating the Bank without establishing and following acceptable internal routine and control policies and audit procedures;
   (j) Engaging in violations of applicable laws and regulations as more fully set forth on page 6-a of the Report of Examination of the Bank by the FDIC as of October 1, 1990.
   IT IS FURTHER ORDERED, that Powder Mill Bank, Morris Plains, New Jersey, its successors, assigns, directors, officers, employees, agents, and other institution-affiliated parties, take AFFIRMATIVE action as follows:

   [.1] 1. (a) The Bank shall have and retain sufficient qualified management and staff. Each member of management and of staff shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications and sufficiency of management and of staff shall be assessed on their ability to:

       (i) comply with the requirements of this ORDER;
       (ii) operate the Bank in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
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       (iv) restore all aspects of the Bank to a safe and sound condition, including capital adequacy, asset quality, management effectiveness, earnings and liquidity.
   During the life of this ORDER, the Bank shall notify the Regional Director of the New York Regional Office of the FDIC ("Regional Director") in writing of any changes in management. Except in the case of any director and any senior executive officer, as defined by the FDIC in section 303.14(a)(3) of its Rules and Regulations ("Regulations"), 12 C.F.R. § 303.14(a) (3), promulgated pursuant to section 32 of the Act, 12 U.S.C. § 1831i ("senior executive officer"), the notification must include the names and background of any additional or replacement management personnel and must be provided not less than 15 days prior to the individual assuming the new position. In the case of any addition to, or replacement of, any member of the board of directors of the Bank, or the employment or change in responsibilities of any individual to any position as a senior executive officer, the notification shall be provided in accordance with section 32 of the Act and section 303.14 of the Regulations.
   (b) To facilitate having the retaining qualified management, the Bank's board of directors shall, within 7 days from the effective date of this ORDER, appoint a committee ("Committee") composed of at least 3 directors who are not now, nor have ever been, involved in the daily operations of the Bank ("Outside Directors"), and whose composition is acceptable to the Regional Director. The Committee shall evaluate the position and performance of each person who is an officer or employee of the Bank on the effective date of this ORDER. The Committee shall determine whether the Bank should retain the position occupied by each such officer and employee, and determine further whether each such officer and employee possesses the ability, experience, integrity, and other qualifications required to perform present and anticipated duties. The results of this evaluation and the recommendations of the Committee shall forthwith be presented to the Bank's board of directors in writing and copies of this evaluation and the recommendations shall be furnished to the Regional Director for review and comment. Upon receiving and considering the comments from the Regional Director, the Bank's board of directors shall implement the recommendations of the Committee with any modifications made thereto after such consideration.

   [.2] 2. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection or charge-off, all assets or portions of all assets classified "Loss" and 50 percent of all assets or portions of all assets classified "Doubtful" by the FDIC as a result of its examination of the Bank as of October 1, 1990, which have not been previously charged-off or collected. In addition, and so long as this ORDER remains in effect, the Bank shall, within 10 days from the receipt of any subsequent Report of Examination of the Bank from the FDIC or the New Jersey Department of Banking ("Department"), eliminate from its books, by collection or charge-off, all assets or portions of assets classified "Loss" and 50% of all such assets or portions of such assets classified "Doubtful" in any such Reports of Examination.

   [.3] (b) Within 30 days from the effective date of this ORDER, and immediately after effecting the charge-offs made pursuant to paragraph 2(a) of this ORDER, the Bank's board of directors shall adopt a method of computing the balance of the Bank's reserve for loan losses that gives consideration to the volume and composition of the loan portfolio not subject to criticism, whether by any bank regulatory agency or by the Bank as a result of its internal reviews of assets. Thereafter, the Bank's board of directors shall, during each quarter, reevaluate the reserve for loan losses and make such additional provisions for loan losses that are, in the judgment of the board, necessary to maintain the reserve at an adequate level relative to the volume of risk in the Bank's loan portfolio. All such additional provisions for loan losses shall be made in the calendar quarter in which the deficiency in the reserve is identified, and shall be reflected in the Report of Condition and the Report of Income filed in such calendar quarter. The minutes of the board of directors of the Bank shall reflect that such reevaluation has been performed, and documentary proof of the method employed in determining the level of the reserve shall {{9-30-91 p.C-1209}}be maintained for future regulatory review.
   (c) All increases in the reserve for loan losses, with the exception or recoveries credited directly to the reserves, shall be accomplished by charges to operating earnings through the provisions for loan losses.
   (d) Within 15 days after complying with paragraphs 2(a) and 2(b) of this ORDER, the Bank shall file amended Consolidated Reports of Condition and amended Consolidated Reports of Income which shall accurately reflect the financial condition of the Bank as of September 30, 1990. Reports filed after the effective date of this ORDER shall also accurately reflect the financial condition of the Bank as of the reporting date.

   [.4] 3. (a) Immediately upon the effective date of this ORDER, and notwithstanding any other provision of this ORDER, the Bank shall not extend, either directly or indirectly, any new or additional credit (which, for the purposes of this ORDER, shall include the granting of renewals or extensions, or the capitalizing of accrued interest) to, or for the benefit of, any borrower who is obligated in any manner to the Bank on any extension of credit, or portion thereof, which has been charged off the books of the Bank in whole or in part, or to any affiliate of, related interest of, or other person or entity associated with, any such borrower, so long as any portion of such extension of credit, whether or not that portion was charged off, remains uncollected.
   (b) Immediately upon the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any new or additional credit to, or for the benefit of, any borrower who is obligated in any manner to the Bank on any loan or other extension of credit that has been adversely classified ("classified borrower"), in whole or in part, by the FDIC as a result of the examination of the Bank as of October 1, 1990 or as a result of any subsequent examination of the Bank by the FDIC or the Department, so long as such loan or other extension of credit remains classified or is uncollected. This paragraph 3(b) shall not prohibit the Bank from renewing all or any part of an extension of credit to a classified borrower who is not subject to the prohibitions of paragraph 3(a) of this ORDER, after collection in cash of interest due on the entire extension of credit. The prohibitions of this paragraph 3(b) shall not apply to any extension of credit to a classified borrower who is not subject to the prohibitions of paragraph 3(a) of this ORDER, if:

       (i) the Bank's failure to extend further credit to a classified borrower would be substantially detrimental to the best interests of the Bank; and
       (ii) prior to extending any credit, a majority of the Bank's full board of directors approves the extension of credit and certifies, in writing, the specific reasons why failure to so act would be substantially detrimental to the best interest of the Bank. A copy of the board of directors' certification shall be maintained in the credit file of the classified borrower.

   [.5] 4. Within 45 days from the effective date of this ORDER, the board of directors of the Bank shall adopt and implement a written program with regard to each asset criticized by the FDIC as a result of its examination of the Bank as of October 1, 1990, so as to eliminate the basis of criticism of each such asset. This program shall include, at a minimum, an assessment of the status of each criticized asset, the proposed action for eliminating the basis of criticism, and the time frame for its accomplishment. Once all such programs are adopted, a copy of the program for each criticized asset which equals or exceeds $100,000 shall be forwarded to the Regional Director and the Commissioner of Banking of the State of New Jersey Department of Banking ("Commissioner"). Furthermore, while this ORDER is in effect, the Bank's board of directors shall, within 30 days following receipt of any Report of Examination of the Bank from the FDIC or the Department, adopt and implement written programs as specified above, for any assets criticized in said Report and not criticized as of October 1, 1990, and forward copies of such programs to the Regional Director and the Commissioner. For the purposes of Paragraphs 3, 4 and 5 of the ORDER, the term "criticized asset" means any asset or group of related assets, or portion thereof, scheduled as "Special Mention", "Substandard", or "Doubtful" in any Report of Examination of the Bank by the FDIC or the Department.
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   5. The Bank's board of directors shall conduct a review of each program adopted pursuant to paragraph 4 of this ORDER at least once in each month, to determine:
   (a) the status of each criticized asset;
   (b) management's adherence to each written program;
   (c) the status and effectiveness of each written program; and
   (d) the need to revise each written program and/or take other actions.
   The board shall send quarterly progress reports on the status of each criticized asset equal to or exceeding $100,000 to the Regional Director and the Commissioner.

   [.6] 6. (a) Within 360 days from the effective date of this ORDER, the Bank shall reduce to not more than 5 percent, the ratio of loans on which interest or principal is past due for 30 days or more to gross loans. If the ratio exceeds 5 percent at the end of such period, a written explanation of the reason for such excess and the status of collection efforts on each such past-due loan shall be reflected in the minutes of the board of directors of the Bank and forwarded to the Regional Director and the Commissioner.
   (b) Within 360 days from the effective date of this ORDER, the Bank shall reduce to not more than 1.0 percent, the ratio of nonaccrual loans to gross loans. If the ratio exceeds 1.0 percent at the end of such period, a written explanation of the reason of such excess and the status of collection efforts on each such nonaccrual loan shall be reflected in the minutes of the board of directors of the Bank and forwarded to the Regional Director and the Commissioner.
   (c) Within 360 days from the effective date of this ORDER, the Bank shall reduce the remaining total of all assets classified "Doubtful" and "Substandard" by the FDIC as a result of the examination of the Bank as of October 1, 1990, to not more than 50 percent of equity capital and reserves, and, subsequently, the Bank shall reduce the total of such assets to not more than 25 percent of equity capital and reserves within 540 days from the effective date of this ORDER.
   (d) The requirements of paragraph 6 of this ORDER shall not be construed as a standard for future operations of the Bank. In addition to accomplishing the foregoing schedule of reductions, the Bank shall eventually reduce all nonaccrual loans, past due loans, and adversely classified assets of the Bank.
   (e) As used in paragraph 6 of this ORDER, the word "reduce" means (1) to collect, (2) to charge-off, or (3) to improve the quality of adversely classified assets sufficiently to warrant removing any adverse classification, as determined by the FDIC.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Bank's board of directors shall revise, adopt, and implement written lending and collection policies and procedures to provide effective guidance and control over the lending function of the Bank. Upon adoption by the board of the revised policies, a copy of each such policy shall be provided to the Regional Director and the Commissioner. At a minimum, the policies shall include the following:
   (a) Standards for all applications for credit which shall include, at a minimum:

       (i) financial statement requirements;
       (ii) credit analysis requirements;
       (iii) loan purpose statement requirements;
       (iv) identification of repayment sources (primary and secondary);
       (v) realistic repayment plan requirements;
       (vi) collateral requirements; and
       (vii) documentation requirements.
   (b) Effective loan administration, servicing and collection procedures including, at a minimum:
       (i) establishing loan amounts requiring board of directors approval;
       (ii) establishing appropriate control and periodic review of collateral;
       (iii) setting forth requirements for maintaining current information, including financial data, in credit files;
       (iv) establishing appraisal and inspection standards, particularly with regard to construction financing;
       (v) standardizing follow-up procedures on maturing and delinquent loans; and
       (vi) ensuring that delinquencies are accurately reported to the board of directors on a monthly basis.
   (c) A loan review system which will {{9-30-91 p.C-1211}}effectively identify, categorize, and report problem credits to the board of directors. Such reports shall, at a minimum, include the following information:
       (i) the overall quality of the loan portfolio;
       (ii) the identification, type and amount of problem loans;
       (iii) the identification and amount of delinquent loans;
       (iv) credit and collateral documentation exceptions; and
       (v) the identification and status of violations of law or regulations.

   [.8] 8. Within 120 days from the effective date of this ORDER, the board of directors of the Bank shall adopt and implement a strategic plan ("Plan") for the Bank covering at least a three-year period. At a minimum, the Plan shall establish objectives for the Bank's earnings performance, growth, balance sheet mix, liability structure, capital adequacy, and reduction in the volume of nonperforming and underperforming assets, together with strategies for achieving those objectives. Such Plan shall also ensure that growth in the amount of aggregate outstanding loans is prudent relative to the Bank's capital structure, its funding sources, and the ability of Bank's management and staff to administer additional loans. The Plan shall also identify capital, funding, managerial and other resources needed to accomplish its objectives.
   [.9]9. Within 120 days from the effective date of this ORDER, the board of directors of the Bank shall adopt a comprehensive earnings plan which, together with the development of operating budgets and projections, shall provide for the achievement of consistent profitability. Particular emphasis should be directed towards achievement of improving net interest margins and reduction in overhead expenses.

   [.10] 10. (a) On the effective date of this ORDER, the Bank shall have a ratio of Tier I capital to total assets equal to or greater than 6.0 percent. Thereafter, at all times while this ORDER is in effect, the Bank shall maintain a ratio of Tier I capital to total assets equal to or greater than 6.0 percent. For the purposes of this ORDER, the terms "Tier I capital" and "total assets" shall be defined as those terms are defined in Part 325 of the Regulations, 12 C.F.R. Part 325.
   (b) If such ratio is less than 6.0 percent, as determined by the FDIC, the Bank shall, within 30 days after receipt of a written notice of the capital deficiency from the Regional Director, present to the Regional Director a capital plan to increase the Tier I capital of the Bank or take other measures to bring the ratio of 6.0 percent. Upon receipt of a written approval or statement of nonobjection from the Regional Director, the revised capital plan shall forthwith be adopted and implemented.
   (c) Such plan for achieving the capital ratio set forth in paragraph 10(b) may include, but is not limited to:

       (i) The sale of new securities in the form of common stock or noncumulative perpetual preferred 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 Tier I capital required by subparagraph 10(b) of this ORDER is to be 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 mate- {{9-30-91 p.C-1212}}rials, 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.

   [.11] 11. The board shall ensure that the Bank maintains adequate sources of liquidity in relation to the Bank's needs. Within 60 days from the effective date of this ORDER, the Bank shall provide to the Regional Director and the Commissioner copies of a board approved policy governing funds management. The policy will contain, at a minimum:
   (a) an acceptable liquidity policy which included a minimum level of liquidity and a maximum loan to deposit ratio;
   (b) an interest rate sensitivity policy;
   (c) a plan of reducing the Bank's reliance on volatile liabilities.
   Upon adoption, the board shall cause management to fully implement the policies with particular attention to improving the Bank's liquidity position.

   [.12] 12. Within 60 days from the effective date of this ORDER, the Bank's board of directors shall revise, adopt, and implement a comprehensive and continuous internal audit program to provide effective guidance and control over the internal routine and controls of the Bank, in accordance with safe and sound banking practices. This audit program shall include, but not be limited to: submission of periodic reports to the board of directors; a review of compliance with the Bank's operating policies and procedures; and an analysis of the Bank's records, systems, audit controls and internal routine and controls. Among other provisions, the revised policies and procedures shall specifically provide for correction of all internal routine and controls deficiencies scheduled by the FDIC as a result of its examination of the Bank as of October 1, 1990. Upon adoption by the board of the revised policies and procedures, a copy of each such policy and procedure shall be provided to the Regional Director and the Commissioner.

   [.13] 13. Within 30 days from the effective date of this ORDER, the Bank shall eliminate or correct all violations of law and regulations, as described on page 6-a of the Report of Examination of the Bank by the FDIC as of October 1, 1990. In addition, within 60 days from the effective date of this ORDER, the board of directors of the Bank shall adopt and implement specific procedures to ensure future compliance with all applicable laws and regulations. Such procedures shall be designed to make the Bank aware, on a continuing basis, of all applicable laws and regulations, and for ensuring compliance therewith. A copy of these procedures shall be forwarded to the Regional Director and the Commissioner.

   [.14] 14. While this ORDER is in effect, the Bank shall give written notice to the Regional Director at such time as the Bank intends to accept, renew or rollover brokered deposits. The notice shall contain the information required to be filed by an undercapitalized insured depository institution seeking approval to utilize brokered deposits as set forth in section 337.6(d) of the Regulations, 12 C.F.R. § 337.6(d), promulgated pursuant to section 29 of the Act, 12 U.S.C. § 1831f, and other related sections. The Regional Director shall have the right to reject the Bank's plan for utilizing brokered deposits. The Bank shall provide, on the first Monday of each month, a written report to the Regional Director detailing the level, source and use of brokered deposits. For the purposes of this ORDER, the term "brokered deposits" shall have the same definition as found in section 337.6(a)(1) of the Regulations, 12 C.F.R. § 337.6(a)(1).

   [.15] 15. While this ORDER is in effect, the Bank shall not declare or pay, either directly or indirectly, any dividends, whether in cash, stock, or otherwise, on its common stock, without the prior written consent of the Regional Director.

   [.16] 16. Following the effective date of this ORDER, the Bank shall send to, or otherwise furnish, its shareholders a description of this ORDER (1) in conjunction with the Bank's next shareholder communication and (2) 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.

   [.17] 17. The Committee appointed pur- {{6-30-93 p.C-1213}}suant to paragraph 1(b) of this ORDER shall monitor the Bank's compliance with this ORDER. Within 30 days from the effective date of this ORDER and at monthly intervals thereafter, such Committee shall prepare and present to the Bank's board of directors a written report of its findings, detailing the form, content, and manner of any action taken to secure compliance with this ORDER and the results thereof, and any recommendations with respect to such compliance. Such progress reports shall be included in the minutes of the Bank's board of directors.

   [.18] 18. By the fifteenth day of each calendar quarter following the effective date of this ORDER, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form, content, and manner of any actions taken to secure compliance with this ORDER, and the results thereof. The Regional Director may subsequently permit the Bank to submit such reports less frequently. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has, in writing, released the Bank from making further reports.
   The effective date of this ORDER shall be 10 days from the date of its issuance.
   The provisions of this ORDER shall be binding upon Powder Mill Bank, its successors, assigns, directors, officers, employees, agents, and other institution-affiliated parties.
   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.
   Date of Issuance: July 24, 1991.

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