Federal Deposit
Insurance Corporation

{{4-30-95 p.C-3399}}
   [¶10,867] In the Matter of The Peoples State Bank, East Berlin, Pennsylvania, Docket No. FDIC-93-182b (8-27-93).

   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 excessive volumes of adversely classified assets; operating with inadequate allowance for loan and lease losses; operating with inadequate liquidity and funds management; operating without proper internal routine and controls; operating in such a manner as to produce low earnings; operating in violation of applicable laws or regulations; operating with management whose policies are detrimental to the Bank; and failing to provide adequate supervision over the Bank's affairs. (This order was terminated by order of the FDIC dated 2-3-95; see ¶15,964.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] Budget and Earnings Plan—Preparation Required
   [.5] Assets—Adversely Classified—Eliminate/Reduce
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Assets—Classified—Reduce—Individual Written Plans
   [.8] Lending and Collection Policy—Minimum Requirements
   [.9] Loan Portfolio—Review and Grading System Required
   [.10] Violations of Law—Eliminate/Correct
   [.11] Liquidity and Funds Management—Written Policy Required
   [.12] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.1] Dividends—Restricted
   [.14] Shareholders—Disclosure—Cease and Desist Order
   [.15] Board of Directors—Committee to Review Compliance with Cease and Desist Order

In the Matter of

THE PEOPLES STATE BANK
EAST BERLIN,PENNSYLVANIA
ORDER TO CEASE AND DESIST
FDIC-93-182b
   The Peoples State Bank, East Berlin, 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 {{4-30-95 p.C-3400}}Federal Deposit Insurance Corporation ("FDIC"), dated August 27, 1993, 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) 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 an inadequate allowance for loan and lease losses;
   (e) Operating the Bank with inadequate liquidity and funds management;
   (f) Operating the Bank with inadequate internal routine and controls;
   (g) Operating the Bank in such a manner as to produce unsatisfactory earnings;
   (h) Engaging in violations of applicable Federal and State laws and/or regulations, as more fully set forth on pages 6-a through 6-a-4 of the joint Report of Examination of the Bank by the FDIC and the Pennsylvania Department of Banking ("Department") as of December 14, 1992;
   (i) Operating the Bank with management whose policies and practices are detrimental to the Bank; and
   (j) 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.
   IT IS FURTHER ORDERED that the Bank take AFFIRMATIVE action as follows:

[.1] 1. (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.
   (b) (i) During the life of this ORDER, the Bank shall notify the Regional Director of the New York Regional Office of the FDIC ("Regional Director") and the Secretary of Banking for the Commonwealth of Pennsylvania ("Secretary") in writing of any resignations and/or terminations of any members of its board of directors and/or any of its officers.
   (ii) 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 in writing at least 30 days prior to any individual assuming a new position as a senior executive officer or any additions to its board of directors.

[.2] 2. (a) Within 180 days from the effective date of this ORDER, the Bank shall have adjusted Tier 1 capital equal to or greater than 6.0 percent of the Bank's adjusted Tier 1 capital equal to or greater than 6.0 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 6.0 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 2(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 shareholders of the Bank; or
   (iii) any combination of the above or other method acceptable to the FDIC.

[.3] 3. (a) Within 30 days from the effective date of this ORDER, the board of directors of the Bank 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 classification as well as to the volume and composition of classified loans, including but not limited to (1) results of the Bank's internal loan review, (2) loan loss experience, (3) an estimate of potential loss exposure on each significant credit, (4) concentration of credit in the Bank, and (5) present and prospective economic conditions. Immediately thereafter, the board of directors of the Bank shall review the adequacy of the Bank's allowance for loan and lease losses utilizing the method adopted pursuant to this paragraph, and shall 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. 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.
   (b) 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.
   (c) All references to loans in this ORDER shall be deemed to include all other forms of extensions of credit.

[.4] 4. (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.

   [.5] 5. 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 December 14, 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 {{10-31-93 p.C-3403}}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.

   [.6. (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 December 14, 1992, to not more than 50 percent of Tier 1 capital plus allowance for loan and lease losses, 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 25 percent of Tier 1 capital plus allowance for loan and lease losses. The requirements of this paragraph 6(a) shall not be construed as a standard for future operations of the Bank.
   (b) 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 and the Department. Reduction of these asses 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.

[.6] 7. (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 ("charged-off 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 7(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, either 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 or the Department as a result of their joint examination of the Bank as of December 14, 1992, 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 extension of credit remains classified or uncollected. This paragraph 7(b) shall not prohibit the Bank from renewing all or any part of an extension of credit to a classified borrower, after collection in cash of interest due on the entire extension of credit.
   (c) The prohibitions of paragraphs 7(a) and 7(b) shall not apply to any extension of credit to a charged-off or classified borrower, if:

   (i) the Bank's failure to extend further credit to a charged-off or classified borrower would be substantially detrimental to the best interests of the Bank;
   (ii) the extension of credit fully complies with the requirements of the Bank's written lending and collection policies and procedures which have been revised, adopted, and implemented pursuant to paragraph 9 of this ORDER;
   (iii) any extension of credit to a charged-off borrower in connection with any real estate-related financial transaction, as defined in section 323.2(h) of the FDIC's Rules and Regulations, 12 C.F.R. § 323.2(h), regardless of amount, is supported by a current appraisal of worth which at a minimum complies in all respects with the requirements of Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323;
   (iv) a comparison with the written program adopted pursuant to paragraph 8 of this ORDER shows that the Bank's {{10-31-93 p.A-3404}}formal program to eliminate the basis of classification of said problem asset is not compromised; and,
   (v) prior to extending any credit to a charged-off borrower, or a classified borrower whose outstanding loans or other extensions of credit exceed $100,000 in the aggregate, 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's certification shall be maintained in the credit file of the charged-off or classified borrower, and shall also be submitted promptly to the Regional Director and the Secretary.

   (i) the state of each classified 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.

   [.8] 9. Within 60 days from the effective date of this ORDER, the Bank's board of directors shall revise its written lending and collection policies and procedures to provide effective guidance and control over the lending function of the Bank and shall submit said revised policies and procedures to the Regional Director. At a minimum, said policies and procedures 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.

   (i) establishing lending limits for specific officers and 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, and guidelines for performing reappraisals and reinspections {{10-31-93 p.C-3405}}which, at a minimum, comply with the requirements of Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323;
   (v) standardizing follow-up procedures on maturity and delinquent loans;
   (vi) ensuring that delinquencies are accurately reported to the board of directors on a monthly basis;
   (vii) placing loans on nonaccrual status in accordance with the Instructions for the Consolidated Reports of Condition and Income; and
   (viii) recognizing losses in a timely manner.

   (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.

[.9] 10. (a) Within 30 days from the effective date of this ORDER, the board of directors of the Bank shall adopt and implement an internal loan review and grading system for periodically reviewing the Bank's loan portfolio and identifying and categorizing problem credits ("System"). At a minimum, the System shall provide for:

   (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 reasons 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 not less than quarterly, to the board of directors on the status of each loan identified and the actions taken by operating management.

   [.10] 11. 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-4 of the joint Report of Examination of the Bank by the FDIC and the Department as of December 14, 1992. In addition, the Bank shall take all steps necessary to ensure future compliance with all applicable Federal and State laws and regulations.

   [.11] 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 as subsequent examinations and/or visitations.

   [.12] 13. 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 revised 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 December 14, 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.

   [.13] 14. 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 any class of its stock, without the prior written consent of the Regional Director and the Secretary.

   [.14] 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.

   [.15] 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 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 {{8-31-95 p.C-3407}}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: August 27, 1993
   Pursuant to delegated authority.