Federal Deposit
Insurance Corporation

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   [¶10,561] In the Matter of First Lehigh Bank, Walnutport, Pennsylvania, Docket No. FDIC-92-173b (6-10-92).

   Bank to cease and desist from such unsafe or unsound practices as operating with management whose policies are detrimental to the Bank; 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 with inadequate capital; operating in such a manner as to produce low earnings; operating with inadequate provisions for funds management; operating in {{8-31-92 p.C-2374}}violation of applicable laws or regulations; failing to comply with provisions of an Order to Cease and Desist; and operating with hazardous concentrations of credit.

   [.1] Board of Directors—Election—Outside Directors Added
   [.2] Management—Qualifications—Review
   [.3] Management—Management Plan—Minimum Requirements
   [.4] Assets—Adversely Classified—Eliminate/Reduce—Timetable
   [.5] Assets—Criticized Assets—Individual Written Plans Required
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Loan Portfolio—Review and Grading System Required
   [.8] Allowance for Loan and Lease Losses—Establish/Maintain
   [.9] Assets—Portfolio—Diversification Required
   [.10] Budget and Earnings Forecast—Preparation Required
   [.11] Dividends—Restricted
   [.12] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.13] Funds Management and Liquidity—Written Policy Required
   [.14] Violations of Law—Eliminate/Correct
   [.15] Brokered Deposits—Reporting to FDIC Required
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Compliance Reports—Frequency

In the Matter of

FIRST LEHIGH BANK
WALNUTPORT, PENNSYLVANIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-173b

   First Lehigh Bank, Walnutport, Pennsylvania ("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) 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 June 10, 1992, 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:

   IT IS HEREBY ORDERED that the Bank, 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 and violations:
   (a) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   (b) Operating the Bank with a board of directors which has failed to provide adequate supervision over and direction to the operating management of the Bank;
   (c) Operating the Bank with an excessive volume of poor quality assets;
   (d) Engaging in hazardous lending and lax collection practices;
   (e) Extending credit which is inadequately secured and without adequate and appropriate supporting documentation;
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   (f) Operating the Bank with an inadequate allowance for loan and lease losses;
   (g) Operating the Bank with inadequate capital in relation to the kind and quality of assets held by the Bank;
   (h) Operating the Bank in such a manner as to produce unsatisfactory earnings;
   (i) Operating the Bank with inadequate liquidity and funds management;
   (j) Engaging in violations of applicable laws and regulations as more fully set forth on pages 6-a through 6-a-1 of the joint Report of Examination of the Bank by the FDIC and the Pennsylvania Department of Banking ("Department") as of May 28, 1991;
   (k) Failing to comply with the provisions of an Order to Cease and Desist dated October 29, 1987; and
   (l) Operating the Bank with excessive concentrations of credit.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. Within 60 days from the effective date of this ORDER, the Bank shall take action to increase the number of members of the board of directors from five to seven, by adding two new members of the board who are not now, nor have ever been, officers or employees of the Bank and are not related by blood or marriage to any directors, officers or employees of the Bank ("Outside Directors").

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

   (i) comply with the requirements of this ORDER;
   (ii) operate the Bank in a safe and sound manner;
   (iii) comply with all applicable laws and regulations; and
   (iv) restore all aspects of the Bank to a safe and sound condition, including capital adequacy, asset quality, management effectiveness, earnings and liquidity.

   [.3] (c) Within 90 days from the effective date of this ORDER, the board of directors of the Bank shall review and make a written report ("Management Report") on the Bank's management needs; with particular emphasis on 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; and
   (vii) provide for periodic review of Bank's management and updating of lending policies and procedures.

   [.4] 3. 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 assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" by the FDIC and the Department as a result of their joint examination of the Bank as of May 28, 1991 ("May 28, 1991 Examination"), which have not been previously charged-off or collected. In addition, and so long as this ORDER remains in effect, the Bank shall, within 30 days from receipt of any subsequent Report of Examination of the Bank from the FDIC or the Department, eliminate from its books, by collection or charge-off, all assets or portions of assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" in said Reports of Examination. Elimination of these assets through the use of the proceeds of loans or other extensions of credit made by the Bank does not constitute collection for the purposes of this ORDER.

4. (a) 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 and the Department as a result of their May 28, 1991 Examination, to not more than 100 percent of Tier 1 capital; within 540 days from the effective date of this ORDER, the Bank shall reduce the total of such assets to not more than 50 percent of Tier 1 capital; and, within 720 days from the effective date of this ORDER, the Bank shall reduce the total of such assets to not more than 25 percent of Tier 1 capital.
   (b) Within 360 days from the effective date of this ORDER, the Bank shall reduce to not more than 10 percent, the ratio of loans on which interest or principal is past due for 30 days or more to gross loans, and, subsequently, within 540 days from the effective date of this ORDER, the Bank shall further reduce such ration to not more than 5 percent. If the ratio exceeds 5 percent at the end of such letter 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.
   (c) Within 360 days from the effective date of this ORDER, the Bank shall reduce to not more than 5 percent, the ratio of nonaccural loans to gross loans, and, subsequently, within 720 days from the effective date of this ORDER, the Bank shall further reduce such ratio to not more than 1.0 percent. If the ratio exceeds 1 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 nonaccrual loan shall be re- {{8-31-92 p.C-2377}}flected in the minutes of the board of directors of the Bank and forwarded to the Regional Director.
   (d) The requirements of paragraph 4 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 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. Reduction of these assets through the use of the proceeds of loans or other extensions of credit made by the Bank does not constitute collection for the purposes of this ORDER.

   (i) the status of each criticized asset:
   (ii) management's adherence to each written program;
   (iii) the status and effectiveness of each written program; and
   (iv) the need to revise each written program and/or take other actions.

[.6] 6. (a) Immediately upon the effective date 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 or 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. The provisions of this paragraph 6(a) shall not apply to the advance of funds by the Bank for the sole purpose of maintaining or protecting the Bank's real estate collateral for any extension of credit, up to a maximum amount of $100,000 in the aggregate for all such advances, with respect to each real estate property securing, in whole or in part, all such extensions of credit.
   (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 {{8-31-92 p.C-2378}}classified, in whole or in part, by the FDIC and the Department as a result of their May 28, 1991 Examination or as a result of any subsequent examination of the Bank by the FDIC or the Department, or to any affiliate or related interest of, or other person or entity associated with, any such borrower ("classified borrower"), so long as such loan or other extension of credit remains classified or is uncollected. This paragraph 6(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 6(a) of this ORDER, after collection in cash of interest due on the entire extension of credit. The prohibitions of this paragraph 6(b) shall not apply to any extension of credit to a classified borrower who is not subject to the prohibitions of paragraph 6(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:
   (ii) a comparison with the written program adopted pursuant to paragraph 5 of this ORDER shows that the Bank's formal program to eliminate the basis of criticism of said criticized asset is not compromised; and
   (iii) 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 interests of the Bank. A copy of the board of directors' certification shall be maintained in the credit file of the classified borrower.

   (i) identifying 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, but in any event no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by operating management.

[.8] 8. (a) Within 30 days from the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's allowance for loan and lease losses. This review shall focus particular attention upon: (i) results of the Bank's internal loan review; (ii) loan loss experience; (iii) an estimate of potential loss exposure on each significant credit; (iv) concentrations of credit in the Bank; and (v) present and prospective economic conditions.
   (b) Immediately upon completing the review required by paragraph 8(a) of this ORDER, the Bank's board of directors shall adopt a method of computing the balance of the Bank's allowance for loan and lease losses that gives consideration to the volume and composition of the loan portfolio not subject to criticism, as well as to the volume and composition of criticized loans, including but not limited to the factors referenced in paragraph 8(a). Thereafter, the Bank's board of directors shall, during the first month of each quarter, reevaluate the allowance for loan and lease losses and make such additional provisions for loan and lease losses that are necessary to maintain the allowance at an adequate level relative to the volume of risk in the Bank's loan portfolio. All such additional provisions for loan and lease losses shall be made in the first month of the calendar quarter in which the deficiency in the allowance is identified, but as of the end of the preceding calendar quarter, and shall be reflected in the Report of Condition and the Report of Income filed in the calendar quarter in which the deficiency is identified with respect to the preceding 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 allowance shall be maintained for future regulatory review.
   (c) All increases in the allowance for loan and lease losses, with the exception of recoveries credited directly to the allowance, shall be accomplished by charges to operating earnings through the allowance for loan and lease losses.
   (d) The Bank shall submit documentation to the Regional Director on a quarterly basis supporting the Bank's funding of the allowance.

[.9] 9. (a) Within 30 days from the effective date of this ORDER, the Bank's board of directors shall adopt and implement a plan to increase the diversification of the Bank's asset portfolio ("Plan"). Specifically, the Plan shall address measures to be taken, target ratios to be met, and interim time frames for reducing the concentration of credit which is detailed on page 2-b of the Report of Examination of the Bank by the FDIC and the Department as of May 28, 1991, as applicable to real estate developers, to less than 100 percent of Tier 1 capital within 540 days from the effective date of this ORDER.
   (b) Immediately upon the effective date of this ORDER, the Bank shall not make any new or additional extensions of credit to any individual or entity, or any group of related, associated, or affiliated individuals or entities, other than advances of funds permitted pursuant to paragraph 6(a) of this ORDER, if, as to any such individual, entity or group, the Bank's total extensions of credit equals or will equal, after any such extension of credit, 25 percent or more of the Bank's Tier 1 capital.

[.10] 10. (a) Within 60 days from the effective date of this ORDER, and within the first 30 days of each calendar year thereafter, the board of directors of the Bank shall develop a written earnings plan consisting of goals and strategies for improving the earnings of the Bank for each calendar year. The written earnings plan shall include, at a minimum:

   (i) identification of the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance;
   (ii) realistic and comprehensive budgets;
   (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections on not less than a quarterly basis; and
   (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

[.11] 11. The Bank shall not declare or pay dividends in any amount, except as follows:

   (a) Such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
   (b) That after payment of such dividends, the ratio of adjusted Tier 1 capital to adjusted Part 325 total assets of the Bank will be not less than 6.5 percent;
   (c) That such declaration and payment of dividends shall be approved in advance by the board of directors of the Bank; and
   (d) That such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director.

   (i) the sale of new securities in the form of common stock;
   (ii) the direct contribution of cash by the directors, shareholders, or parent bank holding company of the Bank; or
   (iii) any combination of the above or other method acceptable to the FDIC.

[.13] 13. Within 90 days from the effective date of this ORDER, the Bank shall formulate and adopt a written liquidity and {{1-31-93 p.C-2381}}funds management policy. Such policy shall include the establishment of acceptable ranges of ratios in the following areas: volatile liabilities. In addition, the liquidity policy shall incorporate a funds management program which designates acceptable levels for: volatile liabilities, including borrowings; asset six, 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 for review and comment.

   [.14] 14. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulations, as described on pages 6-a through 6-a-1 of the Report of Examination of the Bank by the FDIC and the Department as of May 28, 1991. In addition, the Bank shall take all steps necessary to ensure future compliance with all applicable laws and regulations.

   [.15] 15. While this ORDER is in effect, and subject to superseding laws and regulations, 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 FDIC's Rules and 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 FDIC's Rules and Regulations, 12 C.F.R. § 337.6(a)(1).

   [.16] 16. 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, Registration and Disclosure Section, 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. By the 30th day after the end of the calendar quarter in which this ORDER, and by the 15th day after the end of every calendar quarter thereafter, the Bank shall furnish written progress reports to the Regional Director detailing the form, content, and manner of any actions taken to secure compliance with this ORDER, and the results thereof.
   The effective date of this ORDER shall be 10 days from the date of issuance.
   The provisions of this ORDER shall be binding upon the 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.
   Dated: June 10, 1992.
   Pursuant to delegated authority.