{{5-31-94 p.C-2937}}
[¶10,691] In the Matter of The Bank of Chester County, West Chester, Pennsylvania, Docket No. FDIC-92-369b (12-24-92).
Bank to cease and desist from such unsafe or unsound practices as following hazardous lending and lax collection practices; operating with inadequate capital; operating with an excessive level of poor quality asses; operating with inadequate liquidity; operating without proper internal routine and controls; engaging in practices which produce inadequate earnings; operating in violation of applicable laws or regulations; operating with management policies detrimental to the Bank; failing to provide adequate supervision over the Bank's affairs; and operating with excessive reliance on volatile funding. (This order was terminated by order of the FDIC dated 3-31-94; see ¶15,844.)
[.1] Capital—Tier 1 Capital—Increase/Maintain—Methods
[.2] Dividends—Restricted
[.3] Assets—Adversely Classified—Eliminate/Reduce
[.4] Assets—Adversely Classified—Eliminate/Reduce—Timetable
[.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
[.6] Assets—Criticized—Individual Programs Required
[.7] Loan Policy—Written Revision—Minimum Requirements
[.8] Loans—Special Mention—Correct Deficiencies
[.9] Allowance for Loan and Lease Losses—Establish/Maintain
[.10] Budget and Earnings Plan—Preparation Required
[.11] Management—Qualifications—Review
[.12] Liquidity and Funds Management—Policy Required
[.13] Violations of Law—Eliminate/Correct
[.14] Bank Operations—Internal Routine and Controls—Written Policy Required
[.15] Shareholders—Disclosure—Cease and Desist Order
[.16] Board of Directors—Committee to Review Compliance with Cease and Desist Order
{{5-31-94 p.C-2938}}
In the Matter of
THE BANK OF CHESTER COUNTY
WEST CHESTER, PENNSYLVANIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-369b
The Bank of Chester County, West Chester, 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 December 24, 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:
ORDER TO CEASE AND DESIST
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) Engaging in hazardous lending and lax collection practices;
(b) Operating the Bank with inadequate capital in relation to the kind and quality of assets held by the Bank;
(c) Operating the Bank with an excessive volume of poor quality assets;
(d) Operating the Bank with inadequate liquidity and funds management;
(e) Operating the Bank with inadequate internal routine and controls;
(f) Operating the Bank in such a manner as to produce unsatisfactory earnings;
(g) Engaging in violations of applicable Federal and State laws and/or regulations, as more fully set forth on page 6-a of the joint Report of Examination of the Bank by the FDIC and the Pennsylvania Department of Banking ("Department") as of March 30, 1992;
(h) Operating the Bank with management policies and practices which are detrimental to the Bank;
(i) 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; and
(j) Operating the Bank with an excessive reliance upon volatile funding.
IT IS FURTHER ORDERED that the Bank take AFFIRMATIVE action as follows:
[.1] 1. (a) Within 180 days from the effective date of this ORDER, the Bank shall have adjusted Tier 1 capital equal to or greater than 6.5 percent of the Bank's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Bank shall maintain adjusted Tier 1 capital equal to or greater than 6.5 percent of the Bank's adjusted Part 325 total assets.
(b) Any increase in Tier 1 capital necessary to meet the ratio required by paragraph 1(a) of this ORDER may be accomplished by the following:
(i) the sale of new securities in the form of common stock; or
(ii) the direct contribution of cash by the directors or parent bank holding company of the Bank; or
(iii) any combination of the above or other method acceptable to the FDIC.
(c) If all or part of the increase in Tier 1 capital required by paragraph 1(a) of this ORDER is accomplished by the sale of new securities, the board of directors of the Bank shall forthwith 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 Bank securities (including a distribution limited only to the Bank's existing shareholders), the Bank
{{2-28-93 p.C-2939}}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 Federal and State securities laws. Prior to the implementation of the plan and, in any event, not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, 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.
(d) In complying with the provisions of paragraph 1 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph shall be furnished within 10 calendar days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of Bank securities who received or was tendered the information contained in the Bank's original offering materials.
(e) For the purposes of this ORDER, the terms "Tier 1 capital" and "Part 325 total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively sections 325.2(m) and 325.2(n), 12 C.F.R. §§ 325.2(m) and (n). The "Analysis of Capital" schedule on page 3 of the FDIC Report of Examination provides the method for determining the ratio of adjusted Tier 1 capital to adjusted part 325 total assets as required by this ORDER.
(f) The Bank shall not lend funds directly or indirectly, whether secured or unsecured, to any purchaser of Bank stock or to any investor by any other means for the portion of any increase in Tier 1 capital required herein.
[.2] 2. The Bank shall not declare or pay dividends in any amount except as follows:
(a) That 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 of the New York Regional Office of the Federal Deposit Insurance ("Regional Director") and the Secretary of Banking for the Commonwealth of Pennsylvania ("Secretary").
[.3] 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 March 30, 1992, 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 the receipt of any subsequent Report of Examination of the Bank from the FDIC or the Secretary, 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] 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 joint examination of the Bank as of March 30, 1992, to not more than 100 percent of Tier 1 capital, and, within 540 days from the effective date of this ORDER, the Bank shall reduce the remaining total of such assets to not more than 50 percent of Tier 1 capital. The requirements of this paragraph 4(a) shall not be construed as a standard for future operations of the Bank. In addition to ac-
{{2-28-93 p.C-2940}}complishing the foregoing schedule of reductions, the Bank shall eventually reduce all adversely classified assets of the Bank.
(b) As used in this ORDER, the word "reduce" means (i) to collect, (ii) to charge off, or (iii) to improve the quality of adversely classified assets sufficiently to warrant removing any adverse classification, as determined by the FDIC and the Department. 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.
[.5] 5. (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 affiliated 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 5(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 extension of credit that has been adversely classified, in whole or in part, by the FDIC and the Department as a result of their joint examination of the Bank as of March 30, 1992, or as a result of any subsequent examination of the Bank by the FDIC or the Secretary, or to any affiliate or related interest of, or other person or entity associated with, any such borrower ("classified borrower"), so long as such extension of credit remains classified or is uncollected. This paragraph 5(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 5(a) of this ORDER, after collection in cash of interest due on the entire extension of credit. The prohibitions of this paragraph 5(b) shall not apply to any extensions of credit to a classified borrower who is not subject to the prohibitions of paragraph 5(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 6 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.
[.6] 6. (a) Within 30 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 equal to or in excess of $100,000 criticized by the FDIC and the Department as a result of their joint examination of the Bank as of March 30, 1992, 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 Secretary. 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
{{2-28-93 p.C-2941}}implement written programs, as specified above, for any assets criticized in said Reports, and forward copies of such programs to the Regional Director and the Secretary. For the purposes of this ORDER, the term "criticized asset" means any asset, or portion thereof, scheduled as "Special Mention", "Substandard", or "Doubtful" in any Report of Examination of the Bank by the FDIC or the Department.
(b) The Bank's board of directors shall conduct a review of each program adopted pursuant to paragraph 6(a) of this ORDER on at least a monthly basis, to determine:
(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.
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 Secretary.
[.7] 7. Within 60 days from the effective date of this ORDER, the Bank shall review its written loan policy and make whatever changes may be necessary to provide for the safe and sound administration of all aspects of the lending function. Proper and adequate loan documentation or evidence thereof as is required by sound banking practices before disbursement of the loan proceeds to borrowers or before renewal or extensions of existing loans shall be part of the review. Such policy shall provide for identification of primary and secondary sources of repayment, the establishment of and adherence to realistic amortization programs, and proper and adequate loan documentation or evidence thereof as is required by sound banking practices before disbursement of the loan proceeds to borrowers or before renewal or extensions of existing loans. Evidence of the review and establishment of procedures to ensure compliance with the loan policy shall be reduced to writing. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Secretary as determined at subsequent examinations and/or visitations.
[.8] 8. Within 60 days from the effective date of this ORDER, the Bank shall take all necessary steps to eliminate all deficiencies noted in all assets scheduled as "Special Mention" by the FDIC and the Department as a result of their joint examination of the Bank as of March 30, 1992, and within 60 days from the receipt of any subsequent Report of Examination from the FDIC or the Secretary, the Bank shall take the necessary steps to eliminate all deficiencies noted in all assets scheduled as "Special Mention" in each such Report.
[.9] 9. (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 9(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 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 9(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
{{2-28-93 p.C-2942}}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 provision for loan and lease losses.
[.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.
(b) Such written earnings plan and any subsequent modification thereto shall be submitted to the Regional Director and the Secretary for review and comment. Within 30 days after the receipt of any comment from the Regional Director and the Secretary, the board of directors shall approve the written earnings plan, which approval shall be recorded in the minutes of the meeting of the board of directors of the Bank. Thereafter, the Bank shall follow the written earnings plan and/or any subsequent modification thereto.
[.11] 11. (a) The Bank shall have and retain management qualified to restore the Bank to a sound condition. Such management shall include an experienced chief executive officer who shall be given stated written authority by the Bank's board of directors. Such written authority shall include the responsibility for implementing and maintaining lending policies and other Bank policies in accordance with the provisions of this ORDER and sound banking practices.
(b) During the life of this ORDER, the Bank shall notify the Regional Director and the Secretary in writing of any resignations and/or terminations of any members of its board of directors and/or any of its officers.
(c) The Bank shall comply with section 32 of the Act, 12 U.S.C. § 1831i, which includes a requirement that the Bank shall notify the Regional Director and the Secretary in writing at least 30 days prior to any individual assuming a new position or any additions to its board of directors and/or senior executive officers.
[.12] 12. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written liquidity and funds management policy. Such policy shall include the establishment of acceptable ranges of ratios in the following areas: volatile liability dependence, total loans to total deposits and temporary investments to volatile liabilities. In addition, the liquidity policy shall incorporate a funds management program which designates acceptable levels for: volatile liabilities, including borrowings; asset mix, 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. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Secretary as determined at subsequent examinations and/or visitations.
[.13] 13. 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 page 6-a of the joint Report of Examination of the Bank by the FDIC and the Department as of March 30, 1992. In addition, the Bank shall take all steps necessary to ensure future compliance with all applicable Federal and State laws and regulations.
[.14] 14. Within 90 days from the effective date of this ORDER, the Bank's board of directors shall revise, adopt and implement written policies and procedures to provide effective guidance and control over the internal routine and controls of the Bank, in accordance with safe and sound banking practices. Among other provisions, the re-
{{2-28-93 p.C-2943}}vised policies and procedures shall specifically provide for correction of all internal routine and controls deficiencies scheduled by the FDIC and the Department as a result of their joint examination of the Bank as of March 30, 1992. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Secretary as determined at subsequent examinations and/or visitations.
[.15] 15. 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.
[.16] 16. The Bank's board of directors shall appoint a committee composed of at least three directors who are not now and have never been involved in the daily operations of the Bank, and whose composition is acceptable to the Regional Director and the Secretary (the "Compliance Committee"), to monitor the Bank's compliance with this ORDER. Within 30 days from the effective date of this ORDER, and at monthly intervals thereafter such Compliance 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 meeting of the Bank's board of directors.
17. By the 30th day after the end of the calendar quarter in which this ORDER is issued, and by the 15th day after the end of every calendar quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Secretary 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: December 24, 1992.
Pursuant to delegated authority.
