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[¶11,935] In the Matter of First Bank of Central New Jersey, North Brunswick, New
Jersey, Docket No. 01-174b (5-28-02.
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 terminated by order of the FDIC dated 1-16-03; see ¶16,325.)
[.1] Business Plan—Preparation Required
[.2] Management—Qualifications Specified
[.3] Management—Management Report Required
[.4] Capital Plan—Minimum Requirements Specified
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[.5] Loan Policy—Preparation or Revision of Policy Required
[.6] Interagency Guidance on Subprime Lending—Compliance with Policy
Required
[.7] Assets—Charge-off or Collection
[.8] Loans—Extensions of Credit—To Borrowers with Existing Adversely
Classified Credits
[.9] Violations of Law—Correction of Violations Required
[.10] Bank Operations—Internal Routine and Control Procedures—Written Plan
Required
[.11] Reports of Condition and Income—Amendment Required
[.12] Dividends—Dividends Restricted
[.13] Golden Parachute Payments—Prohibited
[.14] Board of Directors—Committee to Review Compliance with Cease and
Desist Order Required
In the Matter of
FIRST BANK OF CENTRAL JERSEY
NORTH BRUNSWICK, NEW JERSEY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FIDC-01-174b
FIRST BANK OF CENTRAL JERSEY, North Brunswick, New Jersey
("Insured Institution"), 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 Insured Institution and of its right to a
hearing on the alleged charges under section 8(b)(1) of the Federal
Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b)(1), 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 May 28, 2002, 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 Insured Institution 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 Insured Institution 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 Insured Institution, its successors
and assigns, its directors, officers, employees, agents, and other
"institution-affiliated parties," (as that term is 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 or entering into hazardous lending and loan
administration practices;
(b) Operating the Insured Institution with inadequate capital in
relation to the kind and quality of assets held and anticipated growth
of the Insured Institution;
(c) Operating the Insured Institution with an excessive volume of
poor quality assets;
(d) Operating the Insured Institution with an inadequate allowance for
loan and lease losses;
(e) Operating the Insured Institution with inadequate loan review;
(f) Operating the Insured Institution with inadequate internal routine
and controls and unsatisfactory risk management policies and
procedures;
(g) Operating the Insured Institution in such a manner as to produce
unsatisfactory earnings;
(h) Operating the Insured Institution in
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such a manner as to produce
operating losses;
(i) Operating the Insured Institution with management whose policies
and practices are detrimental to the Insured Institution and jeopardize
the safety of its deposits;
(j) Operating the Insured Institution with a board of directors which
has failed to provide adequate supervision over and direction to the
active management of the Insured Institution;
(k) Operating the Insured Institution with an excessive concentration
of credit in its subprime indirect automobile loan portfolio;
(l) Operating the Insured Institution without a board of director
approved subprime lending program;
(m) Failing to employ proper accounting methods;
(n) Failing to provide the Insured Institution with operational
personnel who have experience that is adequate to ensure safe and sound
operation of the Insured Institution and to ensure compliance with
applicable laws and regulations; and
(o) Engaging in violations of applicable Federal and State laws and/or
regulations, as more fully set forth on pages 31-34 of the Joint Report
of Examination of the Insured Institution by the FDIC and the State of
New Jersey Department of Banking and Insurance ("NJDBI") as of
June 30, 2001 (the "Joint Report of Examination").
IT IS FURTHER ORDERED that the Insured Institution take
AFFIRMATIVE action as follows:
[.1]1. (a) Within 60 days from the effective date of this ORDER, the board
of directors of the Insured Institution shall develop and submit to the
Regional Director of the New York Regional Office of the FDIC
("Regional Director") and the Commissioner of the Department of
Banking and Insurance of the State of New Jersey ("Commissioner")
a three-year Strategic Business Plan ("Business Plan"), which
includes at a minimum:
(i) objectives and specific strategies with respect to the
Insured Institution's indirect automobile lending program;
(ii) strategies for managing the various types of risks facing the
Insured Institution;
(iii) a minimum of three years of pro-forma quarterly financial
statements, supported by the underlying financial and economic
assumptions;
(iv) projections as to growth, capital, deposit sources, and general
investment plans;
(v) a realistic estimate of the date by which the Insured Institution
shall achieve, satisfactory profitability (earnings that are sufficient
to support operations and maintain adequate capital and allowance
levels after consideration is given to asset quality, growth, and other
factors affecting the quality, quantity, and trend of earnings).
(b) The board of directors of the Insured Institution shall
assess, on at least a quarterly basis, the Insured Institution's
performance in relation to its Business Plan, shall determine the cause
and implications of any substantial deviations therefrom, and shall
amend the Business Plan on an ongoing basis as appropriate.
(c) During the life of this ORDER, the Insured Institution shall
immediately notify the Regional Director and the Commissioner in
writing of any material adverse developments affecting the Insured
Institution's condition, performance or substantial deviation from its
Business Plan.
[.2]2. (a) The Insured Institution 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 Insured Institution. Such management shall include a chief
executive officer and an experienced senior lending officer responsible
for supervising the Insured Institution's lending and the workout of
problem credits. The qualifications of management shall be assessed on
its ability to:
(i) comply with the requirements of this ORDER;
(ii) improve and thereafter maintain the Insured Institution in a safe
and sound manner;
(iii) comply with all applicable Federal and State laws and
regulations, and FDIC, Interagency and FFIEC policy statements;
(iv) restore all aspects of the Insured Institution to a safe and sound
condition, including capital adequacy, asset quality, management
effectiveness, earnings and liquidity; and
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(v) successfully implement the Business Plan prepared in accordance
with paragraph 1.
(b) During the life of this ORDER, the Insured Institution
shall notify the Regional Director and the Commissioner in writing of
any resignations and/or terminations of any members of its board of
directors and/or any of its executive officers. In addition, the
Insured Institution shall comply with section 32 of the Act, 12 U.S.C.
§1831i, which includes a requirement that the Insured Institution
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 the board of directors of the Insured Institution. The
Insured Institution shall also notify the Commissioner in writing at
least 30 days prior to any individual assuming a new position as a
senior executive officer or any additions to the board of directors of
the Insured Institution.
[.3]3. (a) Within 60 days from the effective date of this ORDER, the board
of directors of the Insured Institution shall undertake an in-depth
analysis and review of the Insured Institution's managerial
requirements and make a written report ("Management Report") on
the Insured Institution's management needs. The Management Report
shall incorporate an analysis of the Insured Institution's management
and staffing requirements and shall, at a minimum:
(i) provide a review of the composition, policies and practices
of the Insured Institution's current operating management;
(ii) provide a recommendation of whether current operating management
should be changed, or the terms and conditions under which current
operating management should be continued;
(iii) provide an evaluation of each Insured Institution officer
indicating whether these officials possess the ability, experience and
other qualifications required to perform present and anticipated
duties, including adherence to the Insured Institution's established
policies and practices and maintenance of the Insured Institution in a
safe and sound condition;
(iv) identify both the number and type of positions needed to properly
supervise the Insured Institution's lending functions, giving
appropriate consideration to the Insured Institution's loan volume,
customer base and the number of problem credits;
(v) provide a clear and concise description of the general duties and
responsibilities for each Insured Institution officer and their key
support staff;
(vi) identify the skills, experience and compensation required for each
position;
(vii) establish a plan to recruit, hire and/or replace personnel based
on ability and experience;
(viii) establish a plan providing for periodic evaluation of each
individual's job performance; and
(ix) provide for periodic review of the Insured Institution's
management and updating of lending policies and procedures.
(b) Within 60 days from the effective date of this ORDER, the
board of directors of the Insured Institution shall prepare and submit
to the Regional Director and Commissioner for review and comment a
written plan of implementation ("Plan") addressing the findings
of the Management Report. The Plan shall specify the actions to be
taken by the board of directors and the time frames for each action.
(c) Within 30 days from receipt of any comments from the Regional
Director and the Commissioner, and after consideration of such
comments, the board of directors of the Insured Institution shall
approve the Management Report Plan, which approval shall be recorded in
the minutes of the meeting of the board of directors. It shall remain
the responsibility of the board of directors to fully implement the
Plan within the specified time frames. In the event the Plan, or any
portion thereof, is not implemented, the board of directors shall
immediately advise the Regional Director and the Commissioner, in
writing, of the specific reasons for deviating from the Plan.
[.4]4. (a) Within 60 days from the effective date of this ORDER, the
Insured Institution shall prepare and submit to the Regional Director
and Commissioner for review and comment a capital analysis and plan
(the "Capital Plan") to address the capital deficiency set forth
in the Joint Report of Examination. The Capital Plan shall evaluate the
additional risk associated with the Insured Institution's subprime
indirect automobile lending category and include steps to increase
capital.
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(b) Within 90 days from the effective date of this ORDER and during the
life of this ORDER thereafter, the Insured Institution shall establish
and maintain a total risk-based capital ratio equal to or greater than
eight (8%) percent.
(c) The total risk-based capital ratio shall be calculated utilizing
the framework set forth in the FDIC Statement of Policy on Risk-Based
Capital, Appendices A and B to Part 325 of the FDIC's Rules and
Regulations, 12 C.F.R. Part 325, Appendices A and B, except that the
following risk weights shall be utilized with respect to the Insured
Institution's asset category of indirect automobile loans;
(i) a 150 percent risk weight shall apply to the indirect
automobile loan category when the respective borrower had a credit
bureau risk ("FICO") score greater than 660;
(ii) a 300 percent risk weight shall apply to indirect automobile loan
category when the respective borrower had a FICO score equal to or less
than 660.
(d) The total risk-based capital ratio shall be determined
quarterly by the Insured Institution as part of its capital analysis
conducted in accordance with the guidance provided in the Interagency
Expanded Guidance for Subprime Lending Programs and pursuant to
paragraph 5 of this ORDER. A copy of the Insured Institution's
quarterly capital analysis shall be submitted to the Regional Director
and the Commissioner for review and comment.
(e) Notwithstanding the minimum capital requirement set forth in
paragraph 4(b) of this ORDER, the Insured Institution is expected to
maintain any capital requirement established by the NJDBI which exceeds
the minimum capital requirement set forth in paragraph 4(b) of this
ORDER.
(f) Any increase in capital necessary to meet the risk-based capital
ratio required by paragraph 4(b) of this ORDER or such greater capital
requirement established by the NJDBI pursuant to paragraph 4(e) of this
ORDER, may be accomplished by the following:
(i) the sale of new securities in the form of common stock or
non-cumulative perpetual preferred stock; or
(ii) the direct contribution of cash by the directors of the Insured
Institution; or
(iii) any combination of the above or other method acceptable to the
FDIC and the NJDBI.
(g) If all or part of the increase in capital required by
paragraph 4(b) or paragraph 4(e) of this ORDER is accomplished by the
sale of new securities, the board of directors of the Insured
Institution 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 Insured
Institution securities (including a distribution limited only to the
Insured Institution's existing shareholders), the Insured Institution
shall prepare offering materials fully describing the securities being
offered, including an accurate description of the financial condition
of the Insured Institution 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 and the NJDBI. Any changes requested to
be made in the plan or materials by the FDIC or NJDBI shall be made
prior to their dissemination.
(h) In complying with the provisions of paragraph 4 of this
ORDER, the Insured Institution shall provide to any subscriber and/or
purchaser of Insured Institution 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 Insured Institution securities. The
written notice required by this paragraph 4 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 Insured Institution securities who
received or was tendered the information contained in the Insured
Institution's original offering materials.
(i) The Insured Institution shall not lend funds directly or
indirectly, whether secured or unsecured, to any purchaser of Insured
Institution stock or to any investor by any other means for any portion
of any increase in risk-based capital required herein.
[.5]5. (a) Within 30 days from the effective date of this ORDER, the
Insured Institution
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shall revise, adopt and implement written lending
and collection policies and procedures to provide effective guidance
and control over the subprime lending activities of the Insured
Institution and shall include a review of the adequacy of the Insured
Institution's allowance for loan and lease losses.
(b) For the purpose of this ORDER, the term "subprime" shall have
the meaning and characteristics as described in the Interagency
Expanded Guidance for Subprime Lending Programs.
(c) The policies and procedures shall, at a minimum, include provisions
which will bring the Insured Institution's loan policy into
conformance with the standards and guidance set forth in the
Interagency Guidance on Subprime Lending, the Interagency Expanded
Guidance for Subprime Lending Programs and the FFIEC Uniform Retail
Credit Classification and Account Management Policy. The Insured
Institution's revised subprime lending policies and procedures and
their implementation shall be in a form and manner acceptable to the
Regional Director and the Commissioner. At a minimum, the policies
shall include the following:
(i) establishment of risk management policies and procedures
including procedures to classify subprime loans in accordance with (1)
the Interagency Guidance on Subprime Lending, (2) the Interagency
Expanded Guidance for Subprime Lending Programs, and (3) the FFIEC
Uniform Retail Credit Classification and Account Management Policy;
(ii) establishment of policies and procedures for the timely review and
analysis of the adequacy of the Insured Institution's allowance for
loan and lease losses and the regulatory capital allocated to support
the Insured Institution's subprime lending program. The Insured
Institution shall fully document the methodology and analysis utilized
to support the allowance for loan and lease losses and the regulatory
capital allocated to support the Insured Institution's subprime
lending program. The Insured Institution's capital adequacy analysis
and procedures should include stress and shock testing as such terms
are described in the Interagency Expanded Guidance for Subprime Lending
Programs and an estimation of the indirect automobile loan category's
susceptibility to deteriorating economic, market and business
conditions;
(iii) establishment of subprime lending policies and procedures that
include minimum credit standards and loan review, including portfolio
and transaction level testing, loan classification guidelines, and a
provision to the effect that deviations from the written lending
policies and procedures shall require the prior approval of the board
of directors of the Insured Institution;
(iv) a requirement that a schedule of all loans approved, including
loan modifications, extensions and renewals shall be reviewed by the
board of directors of the Insured Institution on a monthly basis;
(v) a provision ensuring that delinquencies are accurately reported to
the board of directors on a monthly basis;
(vi) a provision specifically outlining the collection procedures to be
taken by the Insured Institution when borrowers fail to make timely
payments; and
(vii) procedures for obtaining, maintaining and reviewing complete and
current credit files on each borrower.
(d) Within 30 days from the effective date of this ORDER, the
board of directors of the Insured Institution shall adopt and implement
a written program for an accurate accounting of the Insured
Institution's indirect automobile loan category, including automobile
repossessions and subsequent automobile sales. The written program
shall include, but not be limited to, hiring a qualified loan officer
for the workout of problem credits; developing management information
systems to monitor subprime loan activity; developing internal and
external audit functions and accounting policies to accurately account
for repossessed automobile assets and gains and/or losses on sales of
Insured institution-financed automobiles; and the elimination of
residual loan balances.
(e) 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.
[.6]6. Immediately upon the effective date of this ORDER, the Insured
Institution shall not extend, either directly or indirectly, any new or
additional credit, with respect to
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subprime lending activities until
such time that the Insured Institution complies with the Interagency
Expanded Guidance for Subprime Lending Programs and receives the prior
written consent of the Regional Director and the Commissioner.
[.7]7. (a) Within 10 days from the effective date of this ORDER, the
Insured Institution shall eliminate from its books, by collection or
charge-off, all items or portions of items classified "Loss" by
the FDIC and the NJDBI as a result of the Joint Report of Examination
of the Insured Institution, which have not been previously charged-off
or collected.
(b) In addition, and so long as this ORDER remains in effect, the
Insured Institution shall, within 30 days from the receipt of any
subsequent report of examination of the Insured Institution from the
FDIC or the NJDBI, eliminate from its books, by collection or
charge-off, all items or portions of items classified "Loss" and
fifty (50%) percent of all items or portions of items classified
"Doubtful" in said report of examination. Elimination of these
items through the use of the proceeds of loans or other extensions of
credit made by the Insured Institution does not constitute collection
for the purpose of this ORDER.
[.8]8. (a) Immediately upon the effective date of this ORDER, the
Insured Institution 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 interests), to or for the benefit of any
borrower who is obligated in any manner to the Insured Institution on
any extension of credit, or portion thereof, which has been charged-off
the books of the Insured Institution ("Charged-Off Borrower"), in
whole or in part, so long as any portion of such extension of credit,
whether that portion was charged-off, remains uncollected.
(b) Immediately upon the effective date of this ORDER, the
Insured Institution 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 Insured Institution on any loan or
other extension of credit that has been adversely classified
("Classified Borrower"), in whole or in part, as a result of the
Joint Report of Examination of the Insured Institution, or as a result
of any subsequent examination of the Insured Institution by the FDIC or
the NJDBI, so long as such loan or other extension of credit remains
classified or uncollected. This paragraph 8(b) shall not prohibit the
Insured Institution 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) All documentation related to the Insured Institution's decision to
extend credit to a Charged-Off Borrower or Classified Borrower shall be
maintained by the Insured Institution.
[.9]9. Within 60 days from the effective date of this ORDER, the Insured
Institution shall eliminate and/or correct all violations of law and/or
regulations, as described on pages 31-34 of the Joint Report of
Examination of the Insured institution. In addition, the Insured
Institution shall take all steps necessary to ensure future compliance
with all applicable Federal and State laws and regulations and FDIC,
Interagency and FFIEC guidance and policy statements.
[.10]10. Within 90 days from the effective date of this ORDER, the Insured
Institution'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 Insured
Institution, 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 as a result of the Joint Report of
Examination of the Insured Institution. Such policy and its
implementation shall be in a form and manner acceptable to the Regional
Director and the Commissioner as determined at subsequent examinations
and/or visitations.
[.11]11. (a) Within 30 days from the effective date of this ORDER, the
Insured Institution shall review all Reports of Condition and Income
filed with the FDIC on and after September 30, 2000 and shall amend and
file with the FDIC amended Reports of Condition and Income which
accurately reflect the financial condition of the Insured Institution
as of the date of each such report.
(b) In addition to the above and during the life of this ORDER, the
Insured Institution shall file with the FDIC, Consolidated Reports of
Condition and Income which accurately reflect the financial condition
of the Insured Institution as of the reporting period. In
particular such reports shall include any adjustment in the Insured
Institution's books
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made necessary or appropriate as a consequence of
any FDIC or NJDBI examination of the Insured Institution during that
reporting period and the results of the Joint Report of Examination of
the Insured Institution.
[.12]12. The Insured Institution 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 Commissioner.
[.13]13. Immediately upon the effective date of this ORDER, the Insured
Institution shall:
(a) Not enter into any agreements with present and former
officers of the Insured Institution which constitute "golden
parachute payments", as defined in section 18(k)(4) of the Act, 12
U.S.C. §1828(k)(4);
(b) Rescind all agreements or portions of agreements with present and
former officers of the Insured Institution which constitute "golden
parachute payments";
(c) Cease making any payments to present and former officers of the
Insured Institution which constitute "golden parachute payments";
and
(d) Take whatever legal steps are necessary to obtain reimbursement
from all former officers of the Insured Institution or any payments
which have already been made to them and which constitute "golden
parachute payments".
[.14]14. The board of directors of the Insured Institution shall appoint a
committee (the "Compliance Committee") composed of at least three
directors who are not now and have never been involved in the daily
operations of the Insured Institution and whose composition is
acceptable to the Regional Director and the Commissioner, to monitor
the Insured Institution'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
Insured Institution's board of directors a written report of its
findings, detailing the form, content, and manner of any action taken
to ensure 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 Insured
Institution's board of directors. Nothing contained herein shall
diminish the responsibility of the entire board of directors to ensure
compliance with the provisions of this ORDER.
15. The Insured Institution shall provide on a monthly basis to the
Regional Director and Commissioner reports for the prior month as
follows:
(a) Consolidated and Insured Institution only statements of
condition and income;
(b) Report of performance indicators for the month including:
(i) calculations providing Tier 1 leverage capital and Tier 1 and
total risk-based capital ratios;
(ii) return on average assets (annualized to date);
(iii) net interest margin (annualized to date);
(c) Loan portfolio reports of delinquency and charge-off activity.
(d) The term "Tier 1 capital" shall have the meaning ascribed to
it in Part 325 of the FDIC's Rules and Regulations, section 325.2(t),
12 C.F.R. 325.2(t).
16. By the 30th day after the end of the calendar quarter
following the effective date of this ORDER, and by the 15th day after
the end of every calendar quarter thereafter, the Insured Institution
shall furnish written progress reports to the Regional Director and the
Commissioner detailing the form, content, and manner of any actions
taken to secure compliance with this ORDER, and the results thereof.
17. Following the effective date of this ORDER, the Insured Institution
shall send each shareholder a description of this ORDER. The
description shall fully describe the ORDER in all material respects.
The effective date of this ORDER shall be ten (10) days from the date
of its issuance as set forth below.
The provisions of this ORDER shall be binding upon the Insured
Institution, its successors, assigns, directors, officers, employees,
agents, and other institution-affiliated parties.
The provisions of this ORDER shall remain effective and enforceable
except to the extent that, and until such time as, any provisions of
this ORDER shall have been modified, terminated, suspended, or set
aside by the FDIC.
Pursuant to delegated authority.
Dated: May 28, 2002.
