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FDIC Enforcement Decisions and Orders

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   [11,745] In the Matter of The Findlay Savings Bank, Cincinnati, Ohio Docket No. 00-103c&b (12-6-00).

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 12-26-01; see ¶16,298.)

   [.1] Management—Qualifications Specified

   [.2] Board of Directors—Outside Directors Added to Board

   [.3] Capital—Increase Required
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   [.4] Bank Operations—Transactions—Policy Specified

   [.5] Bank Operations—Backup and Offsite Storage Procedures Required

   [.6] Disaster Recovery Plan—Required

   [.7] Information System Activities—Written Assessment Required

   [.8] Audit—Program Required

   [.9] Reconciliation of Books and Records—Required

   [.10] Reconciliation of Books and Records—Examination Required

   [.11] Interest Rate Risk Policy—Minimum Requirements

   [.12] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required

   [.13] Reports of Condition and Income—Amendment Required

   [.14] Violations of Law—Correction of Violations Required

   [.15] Loan Policy—Preparation or Revision of Policy Required

   [.16] Profit Plan—Preparation of Plan Required

   [.17] Board of Directors—Committee to Review Compliance with Cease and Desist Order Required

In the Matter of:
THE FINDLAY SAVINGS BANK
CINCINNATI, OHIO
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-00-103c&b

   The Federal Deposit Insurance Corporation ("FDIC"), on September 14, 2000, issued to The Findlay Savings Bank, Cincinnati, Ohio ("Bank"), a NOTICE OF CHARGES AND OF HEARING ("NOTICE") pursuant to section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b). The NOTICE charged the Bank with having engaged in unsafe or unsound banking practices. The Bank has also been advised of its right to a NOTICE OF CHARGES AND OF HEARING pursuant to Section 1163.03 of the Ohio Revised Code, detailing the unsafe or unsound banking practices alleged to have been committed by the Bank, and of its right to a hearing on the charges. Having waived those rights, the Bank and representatives for the FDIC and the Division of Financial Institutions for the State of Ohio, Columbus, Ohio ("ODFI") thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated November 28, 2000, whereby, solely for the purpose of this proceeding and without admitting or denying the allegations in the NOTICE, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC and the ODFI.

   The FDIC and the ODFI considered the matter and determined that they had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws or regulations. The FDIC and the ODFI, therefore, accepted the CONSENT AGREEMENT and issued the following:

   

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. §1813(u), and its successors and assigns, cease and desist from the following unsafe or unsound banking practices and violations of law or regulation:

       A. Operating with inadequate internal routines and controls;

       B. Failing to accurately maintain books and records;

       C. Failing to implement adequate information systems ("IS") controls;

       D. Operating with inadequate financial and IS audit programs;

       E. Operating without an adequate disaster recovery plan;

       F. Operating without adequate procedures for information backup;
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       G. Operating with an inadequate allowance for loan and lease losses ("ALLL") for the volume, kind, and quality of loans and leases held;

       H. Operating with lending policies and practices which fail to address subprime lending, as that term is used in the Interagency Guidelines on Subprime Lending;

       I. Operating with inadequate earnings to maintain acceptable levels of capital;

       J. Violating laws and regulations;

       K. Operating with inadequate liquidity in light of the Bank's asset and liability mix;

       L. Failing to adequately monitor and control interest rate risk;

       M. Operating with management whose policies and practices are detrimental to the Bank and which jeopardize the safety of its deposits; and

       N. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management.

   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] .1 (a) During the life of this ORDER, the Bank shall have and retain qualified management. Within 10 days of the effective date of this ORDER, the Bank shall submit Notifications of Addition of a Senior Executive Officer under section 32 of the Act, 12 U.S.C. §1813i for a new chief executive officer and a new chief financial officer acceptable to the FDIC and to the ODFI. The executive officers shall assume duties immediately upon receipt of section 32 approval.

   (b) Each member of management shall have the qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications of Bank management shall be assessed on its ability to: (i) cause the Bank to comply with the requirements of this ORDER; (ii) cause the Bank's electronic or automated information systems to maintain complete and accurate books and records for the Bank and its wholly-owned subsidiary FSB Funding, Inc. ("Subsidiary"); (iii) provide oversight of the data processing activities of the Bank and the Subsidiary; (iv) retain staff experienced in the types of computer systems used by the Bank and the Subsidiary; and (v) operate the Bank and the Subsidiary in a safe and sound manner.

   [.2] 2. Within 90 days from the effective date of this ORDER, the Bank shall submit Notifications of Addition of a Director under section 32 of the Act, 12 U.S.C. §1813i for two new independent directors acceptable to the FDIC and to the ODFI. Thereafter, the Bank shall maintain a board of directors that includes at least two independent directors. For purposes of this ORDER, a person who is independent shall be any individual: (a) who is not an officer of the Bank, any subsidiary of the Bank, any of its affiliated organizations, or any company or bank controlled by any director of the Bank; (b) who does not own more than 5 percent of the outstanding shares of the Bank; (c) who is not related by blood or marriage to an officer or director of the Bank or to any shareholder owning more than 5 percent of the Bank's outstanding shares, and who does not otherwise share a common substantial financial interest with such officer, director or shareholder; and (d) who is not indebted to the Bank in an amount exceeding 5 percent of the Bank's total Tier 1 capital and ALLL, directly or indirectly. For purposes of this paragraph, indirect indebtedness includes the debt of any person related by blood or marriage, or of any entity in which the individual has a substantial financial interest. After compliance with section 32 of the Act and Part 303, Subpart F of the FDIC Rules and Regulations, 12 C.F.R. Part 303, Subpart F, the addition of any new Bank directors required by this paragraph may be accomplished, to the extent permissible by state statute or the Bank's by-laws, by means of appointment or by election at a regular or special meeting of the Bank's shareholders.

   [.3] .3 (a) Within 30 days from the last day of each calendar quarter following the effective date of this ORDER, the Bank shall determine from its Report of Condition and Income its level of Tier 1 leverage capital as a percentage of its average total assets ("capital ratio") for that calendar quarter. If the capital ratio is less than 8.0 percent, the Bank shall, within 60 days of the date of the required determination, increase its capital ratio to not less than 8.0 percent calculated as of the end of that preceding quarterly period. For purposes of this ORDER, Tier 1 leverage capital and average total assets shall be calculated in accordance with Part 325 of
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   the FDIC Rules and Regulations ("Part 325"), 12 C.F.R. Part 325.

   (b) Any such increase in Tier 1 capital may be accomplished by the following:

       (i) The sale of common stock and noncumulative perpetual preferred stock constituting Tier 1 capital under Part 325;

       (ii) The elimination of all or part of the assets classified "Loss" as of July 10, 2000, without loss or liability to the Bank, provided any such collection on a partially charged-off asset shall first be applied to that portion of the asset which was not charged off pursuant to this ORDER;

       (iii) The collection in cash of assets previously charged off; or

       (iv) The direct contribution of cash by the directors and/or the shareholders of the Bank; or

       (v) Any other means acceptable to the Regional Director for the FDIC's Chicago Regional Office ("Regional Director"), and the Superintendent of the ODFI ("Superintendent"); or

       (vi) Any combination of the above means.

   (c) If all or part of the increase in capital required by this paragraph 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 by or controlled by them in favor of said plan. Should the implementation of the plan involve public distribution of the Bank securities the Bank shall prepare detailed 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 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 materials used in the sale of the securities shall be submitted to the FDIC Registration and Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429, and to the Ohio Division of Financial Institutions, 77 High Street, 21st Floor, Columbus, Ohio 43266-0121, for its review. Any changes requested to be made in the materials by the FDIC or the ODFI shall be made prior to their dissemination.

   (d) In complying with the provisions of paragraph 3(c) of this ORDER, until the offering is completed, 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 in such offering. The written notice required by this paragraph shall be furnished within 10 calendar days of the date any material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of the Bank's original offering materials.

   (e) The capital ratio analysis required by this paragraph shall not negate the responsibility of the Bank and its board of directors for maintaining throughout the year an adequate level of capital protection for the kind, quality and degree of market depreciation of assets held by the Bank.

   [.4] .4 Effective immediately, the Bank shall eliminate the practice of un-posting and re-posting transactions.

   [.5] .5 The Bank shall immediately establish and implement adequate backup and offsite storage procedures for data on in-house information systems.

   [.6] .6 (a) Within 10 days from the effective date of this ORDER, the Bank shall develop and implement a disaster recovery plan that addresses all critical services and operations which are provided by internal and external sources. The plan shall be submitted to the Regional Director and the Superintendent for review and comment. At a minimum, the plan shall address:

       (i) recovery priorities and procedures;

       (ii) determination of when to use alternate sites;

       (iii) notification to employees;

       (iv) procedures for performing backup and offsite storage;

       (v) obtaining backup equipment, software, and current master file backup; and

       (vi) all of the deficiencies regarding the Bank's current plan as discussed in the FDIC's IS Report of Examination as of July 10, 2000 ("IS Report").

   (b) Within 60 days of the Bank's receipt
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   of any comments from the Regional Director and the Superintendent, and annually thereafter, the Bank shall test the disaster recovery plan and report the results of the test to the board of directors or designated committee. The test of the plan should include:

       (i) testing of all critical business units and functions;

       (ii) the use of realistic activity volumes;

       (iii) the use of actual backup system and data files from offsite storage;

       (iv) participation and review by internal audit staff; and

       (v) a corrective plan of action for all problems encountered.

   (c) The Bank's board of directors will review, update, and approve the disaster recovery plan annually.

   [.7] .7 (a) Within 45 days of the effective date of this ORDER, the Bank shall prepare a written assessment of information systems activities of the Bank and the Subsidiary. This assessment shall address the findings of the IS Report with respect to information systems and shall include the Bank's proposed corrective measures.

   (b) Within 10 days of the completion of the assessment described above, the Bank's board of directors shall review, approve, and submit its written assessment to the Regional Director and the Superintendent for review and comment.

   (c) Within 30 days of receipt of the Regional Director's and the Superintendent's comments on the written assessment, the Bank will adopt and implement all corrective measures detailed in the assessment.

   [.8] .8 (a) Within 60 days from the effective date of this ORDER, the Bank's board of directors shall formulate and submit to the Regional Director and the Superintendent for review and comment a comprehensive written audit program, which provides for an effective system of internal and external audits.

   (b) The audit program described in Paragraph 8(a) shall include a written IS audit program, which shall address:

       (i) Whether IS auditing will be performed internally by the Bank or by an auditing firm whose ownership shall be "independent," as that term is defined in Paragraph 2, and which is competent to perform such an audit;

       (ii) The frequency and scope of IS auditing;

       (iii) Designation of qualified personnel to perform the audit; and

       (iv) Requiring the reporting of findings to the Bank's board of directors or a committee designated by the Bank's board of directors.

   (c) Within 10 days of receipt of the Regional Director's and the Superintendent's comments, the Bank shall implement the audit program. The internal auditor shall make written monthly reports of audit findings directly to the Bank's board of directors. The minutes of the meetings of the board of directors shall reflect consideration of these reports and describe any action taken as a result thereof.

   [.9] 9. Within 10 days of the effective date of this ORDER, the Bank shall have reconciled its books and records as of September 30, 2000, and those of the Subsidiary, and shall continue to maintain accurate books and records. Written documentation of the correction or reconciliation shall be retained for future regulatory review.

   [.10] 10. (a) Within 10 days from the effective date of this ORDER, the Bank shall retain a certified public accounting firm whose ownership shall be "independent," as that term is defined in paragraph 2 of this ORDER, and which is acceptable to the Regional Director and the Superintendent, to conduct an agreed-upon procedures examination ("examination"), including, but not limited to, reconciliation of the financial statements of the Bank and the Subsidiary, as of September 30, 2000.

   (b) At a minimum, the examination shall determine:

       (i) Whether the Bank and the Subsidiary have reconciled all accounts and the date of the most recent reconciliation of each account;

       (ii) For all accounts of the Bank and the Subsidiary:

         (1) Whether reconciliations are done in a timely manner based on the risk and volume of activity in each account;

         (2) Whether reconciliations adequately report the dollar amount and the description of any outstanding unreconciled transactions; and

         (3) The adequacy of the segregation of duties of the personnel preparing the reconciliations; and
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         (4) The collectibility of any unreconciled debits outstanding in excess of 90 days, as of September 30, 2000.

       (iii) Whether the Bank and the Subsidiary have adequate written reconciliation procedures for each account.

   (c) The Bank shall require, as part of its agreement with the accounting firm retained to perform the examination, that the accounting firm complete the examination within 30 days from the effective date of the ORDER. The accounting firm's initial written report, whether in draft or final form, shall be submitted directly to the Regional Director and the Superintendent at the same time the report is submitted to the Bank.

   (d) Within 10 days of the Bank's receipt of the examination, the Bank shall carry out all recommendations from this examination.

   (e) Within 10 days of the effective date of this ORDER, and every 30 days thereafter, all outstanding debits that are unresolved for more than 90 days shall be charged off from the books of the Bank and the Subsidiary.

   [.11] 11. (a) Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement policies and procedures for managing the Bank's sensitivity to interest rate risk. The Bank's policy shall comply with the Joint Agency Statement of Policy on Interest Rate Risk dated June 26, 1996, and the Joint Supervisory Statement on Investment Securities and End-user Derivative Activities dated April 23, 1998. The Bank shall submit the policy to the Regional Director and the Superintendent for their review and comment.

   (b) Within 30 days from the Bank's receipt of any comments from the Regional Director and the Superintendent, the Bank shall revise its policies to be consistent with the Bank's interest rate risk measurement methodology.

   [.12] 12. (a) Within 60 days from the effective date of this ORDER, the bank shall formulate and submit to the Regional Director and the Superintendent for review and comment a written policy addressing liquidity and asset/liability management. Annually thereafter during the life of this ORDER, the Bank shall review this policy for adequacy and, based upon such review, shall make appropriate revisions in the policy that are necessary to strengthen funds management procedures and maintain adequate provisions to meet the Bank's liquidity needs. A copy of the revised policy shall also be submitted to the Regional Director and the Superintendent upon its completion. The initial policy shall include, at a minimum, provisions:

       (i) Establishing a desirable range for its net non-core funding ratio;

       (ii) Requiring that monthly calculations of the net non-core funding ratio be provided to the board of directors for review, with such review noted in the board minutes;

       (iii) Identifying the source and use of borrowed and/or volatile funds;

       (iv) Establishing a contingency plan to address liquidity deficiencies; and

       (v) Establishing parameters for borrowing funds such as limits concerning dollar amounts and duration.

   (b) Within 30 days from the receipt of all such comments from the Regional Director or the Superintendent, and after consideration of all such comments, the Bank shall approve the policy, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow the policy.

   [.13] 13. (a) Within 10 days from the effective date of this ORDER, after review and consideration by the board of directors, the Bank shall make any required additional provision for loan and lease losses which reflects the potential for losses in the remaining loans or leases classified "Substandard" and all other assets in its portfolio and that of its Subsidiary. At a minimum, the Bank shall adjust the ALLL in accordance with the recommendation in the Joint FDIC/ODFI Report of Examination of the Bank as of July 10, 2000 ("Joint Report").

   (b) Within 30 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to July 10, 2000, shall be amended and refiled if they do not reflect a provision for loan and lease losses and an ALLL which are adequate considering the condition of the Bank's loan portfolio, and which, at a minimum, incorporate the adjustments required by the above subparagraphs of this ORDER.

   (c) Prior to submission or publication of all Reports of Condition and Income required by the FDIC after the effective date
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   of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's ALLL and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the findings of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.

   [.14] 14. (a) Within 30 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and/or regulations listed in the Joint Report including, but not limited to, correction of the violation of Section 1161.58(D)(2) of the Ohio Revised Code, regarding the loans to the Subsidiary.

   (b) Within 30 days from the effective date of this ORDER, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.15] 15. (a) Within 30 days from the effective date of this ORDER, and annually thereafter, the board of directors of the Bank shall review the Bank's loan policy and procedures for adequacy and, based upon this review, shall make all appropriate revisions to the policy necessary to strengthen lending procedures and abate additional loan deterioration. The revised written loan policy and any subsequent modifications shall be submitted to the Regional Director and the Superintendent for review and comment upon their completion.

   (b) The initial revisions to the bank's loan policy required by this paragraph, at a minimum, shall include provisions which will bring the policy into conformance with the standards set forth in the Interagency Guidance on Subprime Lending.

   [.16] 16. (a) Within 90 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director and the Superintendent for review and comment a written profit plan and a realistic, comprehensive budget for all categories of income and expense for calendar year 2001. Thereafter, the Bank shall revise the budget at least 30 days prior to the end of every calendar quarter to address the following four calendar quarters. The plan required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the Bank's overall earnings, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components.

   (b) The written profit plan shall address, at a minimum salaries paid to employees of the Bank and its Subsidiary, and occupancy expenses.

   (c) Within 30 days following the end of each calendar quarter, the Bank's board of directors shall evaluate the Bank's actual performance in relation to the plan and budget required by this paragraph and record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors' meeting at which such evaluation is undertaken.

   (d) The written profit plan and budget required by this ORDER shall be prepared and submitted to the Regional Director and the Superintendent for review and comment 30 days prior to the end of each calendar year for which this ORDER is in effect. Within 30 days of receipt and consideration of all such comments from the Regional Director and the Superintendent, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow the plan.

   [.17] 17. (a) Within 30 days from the effective date of this ORDER, the Bank's board of directors shall develop, adopt, and implement a program that will provide for monitoring of the Bank's compliance with this ORDER.

   (b) Following the required date of compliance with subparagraph (a) above, the Bank's board of directors shall review the Bank's compliance with this ORDER and record its review in the minutes of each regularly scheduled monthly board of directors' meeting.

   18. Within 30 days following the end of every calendar quarter following the effective date of this ORDER, the Bank shall furnish to the Regional Director and the Superintendent written progress reports, signed by each member of the Bank's board of directors, detailing the form and manner of any actions taken to secure compliance with this ORDER. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Superintendent have, in writing, released the Bank from making further reports.

   The effective date of this ORDER shall be
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   a 10 days after its issuance by the FDIC and the ODFI.

   The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and any successors and assigns thereof.

   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 and the ODFI.

   Pursuant to delegated authority.

   Dated: December 6th, 2000.

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