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FDIC Enforcement Decisions and Orders

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   [12,020] In the Matter of Bank of Friendship, Friendship, Tennessee, Docket No. 03-030b (2-6-03).

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent was engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 12-17-04; see ¶16,406.)

   [.1] Management—Changes in, Notification Required—Qualifications Specified

   [.2] Capital—Maintain Tier 1 Capital

   [.3] Loan Loss Reserve—Establish of or Increase in Required

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

   [.5] Ethics—Written Policy Required

   [.6] Assets—Charge-off or Collection

   [.7] Loans—Extensions of Credit—Curtail to Existing Borrowers

   [.8] Loans—Policy—Amendment Required

   [.9] Loan Review and Grading System—Establishment Required

   [.10] Loan Review Committee—Establishment Required

   [.11] Violations of Law—Corrections of Violations Required

   [.12] Financial Statements—External Audit Required

   [.13] Audit—Internal Audit—Risk Assessment Required

   [.14] Bank Holding Company—Fees Paid to Bank Holding Company, Limitations Imposed On

   [.15] Profit Plan—Preparation of Plan Required

   [.16] Funds Management—Preparation or Revision of Funds Management Policy Required

   [.17] Golden Parachute Payments—Prohibited

   [.18] Information Systems Activities—Written Policy Required

   [.19] Security Controls—Independent Officer Required

   [.20] ATM Network—Written Policy Required

   [.21] Dividends—Dividends Restricted

   [.22] Brokered Deposits—Notification Required

   [.23] Shareholders—Disclosure of Cease and Desist Order Required

   [.24] Progress Report—Written Report Required

In the Matter of
BANK OF FRIENDSHIP
FRIENDSHIP, TENNESSEE
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-03-030b

   Bank of Friendship, Friendship, Tennessee ("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 and/or contraventions of policy alleged to have been committed by the Bank 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") and the Tennessee Commissioner of Financial Institutions with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated February 6, 2003, 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 and/or contraventions of policy. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, 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)), and its successors and assigns cease and desist from the following unsafe or unsound banking practices and violations:

   (a) Engaging in hazardous lending and lax collection practices;

   (b) Operating with inadequate capital in relation to the kind and quality of assets held by the Bank;

   (c) Operating with a large volume of poor quality loans;

   (d) Operating with an inadequate loan valuation reserve;

   (e) Operating with excessive contingent liabilities and inadequate provisions for liquidity;

   (f) Operating with inadequate internal routine and controls policies;

   (g) Operating in such a manner as to produce operating losses;

   (h) Operating in violation of section 23A of the Federal Reserve Act, 12 U.S.C. §371c, made applicable to state nonmember banks by section 18(j)(1) of the Act, 12 U.S.C. §1828(j)(1); sections 215.8(c) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.8(c), made applicable to state nonmember banks by section 18(j)(2), 12 U.S.C. §1828(j)(2); Section 39 of the Act, 12 U.S.C. §1831p-1 and its implementing regulations, Part 364 of the FDIC Rules and Regulations and Appendix A to Part 364 of the FDIC Rules and Regulations, 12 C.F.R. Part 364; Section 206.5 of
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   the Board of Governors of the Federal Reserve Regulation F, 12 C.F.R. §206.5(B); Section 32 of the Act, 12 U.S.C. §1831i and its implementing regulation, section 303.102(a)(2) of the FDIC Rules and Regulations, 12 C.F.R. §303.102(a)(2); Sections 323.3 and 323.5(b) of the FDIC Rules and Regulations, 12 C.F.R. §§ 323.3 and 323.5(b); Section 326.8(b) of the FDIC Rules and Regulations, 12 C.F.R. §326.8(b); Section 337.2(d) of the FDIC Rules and Regulations, 12 C.F.R. §337.2(d); Section 353.3(a)(2) of the FDIC Rules and Regulations, 12 C.F.R. §353.3(a)(2); chapter 0180-7.09 of the Tennessee Department of Financial Institution's Rules and Regulations; section 45-2-401 of the Tennessee Code Annotated, 45 T.C.A. §2-401; in contravention of the policies set out in Appendix A to Part 364 of the FDIC Rules and Regulations, 12 C.F.R. Part 364; Appendix A of Part 365, 12 C.F.R. Part 365; the Supervisory Policy Statement on Investment Securities and End-User Derivative Activities; the Joint Agency Policy Statement on Interest Rate Risk; the Interagency Statement on Contingency Planning for Financial Institutions; and the Interagency Policy Statement on the Allowance for Loan and Lease Loss Reserve.

   (i) Operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits; and

   (j) Operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank.

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

   [.1]1. (a) Within 60 days from the effective date of this ORDER, the Bank shall have 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 supervising the Bank's overall affairs and for implementing, maintaining, and monitoring Bank policies in accordance with sound banking practices. Such management shall also include a chief operating officer who shall be given stated written authority by the Bank's board of directors. Such written authority shall include responsibility for supervising the Bank's overall operations and maintaining Bank operations in accordance with sound banking practices. Such management shall also include a chief lending officer who shall be given stated written authority by the Bank's board of directors. Such written authority shall include responsibility for supervising the Bank's lending and collections functions to be carried out in accordance with this ORDER and safe and sound banking practices.

   (b) Present management shall be assessed on its ability to:

       (i) Comply with the requirements of this ORDER;

       (ii) Improve, and thereafter maintain, the Bank in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, earnings adequacy; and sensitivity to market risk; and

       (iii) Comply with all applicable State and Federal laws, regulations, and statements of policy.

   (c) (i) During the life of this ORDER, the Bank shall notify the Regional Director of the Dallas Regional Office, through the Memphis Area Office of the Dallas Region ("Regional Director") and the Commissioner of Financial Institutions for the State of Tennessee ("Commissioner") in writing of any resignations and/or terminations of any members of its board of directors and/or any of its senior executive officer(s) within 15 days of the event.

   (ii) The Bank shall comply with section 32 of the Act, 12 U.S.C. §1831i.

   (d) (i) Within 90 days from the effective date of this ORDER, the board of directors shall prepare and forward, to each shareholder of the Bank, a list of potential candidates for nomination to the Bank's board of directors at the next meeting of shareholders of the Bank at which directors are to be elected. The list of candidates shall include individuals who are independent with respect to the Bank, in such number that, if elected, would cause a majority of the board of directors to be comprised of outside directors as defined herein. The actions taken in identifying potential candidates, including any communication with such individuals, shall be documented and made part of the minutes of the board of directors. Copies of these board minutes shall be provided to the Regional Director and the Commissioner
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   within 120 days from the effective date of this ORDER.

   (ii) At the next meeting of the shareholders of the Bank, at which directors of the Bank are to be elected, and at each succeeding meeting of the shareholders at which directors are to be elected, the members of the board of directors who are also shareholders shall nominate and support the election of candidates to the board of directors who are independent with respect to the Bank and who have agreed to stand for election to the board of directors, in such number as is necessary to cause a majority of the board of directors to be, and to remain, comprised of outside directors.

   (e) Within 30 days from the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure that the Bank complies with the provisions of this ORDER. At least two-thirds of the members of such committee shall be independent, outside directors as defined herein. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER, shall be included in the minutes of the 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.

   (f) For the purposes of this ORDER, an "outside director" shall be an individual:

       (i) Who shall not be employed, in any capacity, by the Bank or its affiliates other than as a director of the Bank or an affiliate;

       (ii) Who shall not own or control more than 5 percent of the voting stock of the Bank or its holding company;

       (iii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than 5 percent of the Bank's equity capital and reserves;

       (iv) Who shall not be related to any directors, principal shareholders of the Bank or affiliates of the Bank; and

       (v) who shall be a resident of, or engage in business in the Bank's trade area.

   (g) Within twelve months from the effective date of this ORDER, each member of the board of directors shall attend at least eight (8) hours of training relating to the duties and responsibilities of bank directors. This training shall be conducted or sponsored by a recognized authority on banking-related issues, subject to the approval of the Regional Director and Commissioner.

   [.2]2. (a) Within 90 days from the effective date of this ORDER, the Bank shall have Tier 1 capital equal to or greater than eight (8.0) percent of the Bank's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Bank shall maintain Tier 1 capital equal to or greater than eight (8.0) 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, shareholders, or parent Bank holding company of the Bank; or

       (iii) Any other method acceptable to the FDIC.

   (c) If all or part of the increase in Tier 1 capital required by Paragraph 2(a) of this ORDER is 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 or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank 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 the Federal 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, Accounting & Securities Unit, 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429 for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination. If the Regional
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   Director allows any part of the increase in Tier 1 capital to be provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue, including but not limited to, those terms and conditions relative to the interest rate and any convertibility factor, shall be presented to the Regional Director and Commissioner for prior approval.

   (d) In complying with the provisions of Paragraph 2 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's 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 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 the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.

   (e) For 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 subsections 325.2(v), and 325.2(x), 12 C.F.R. §§ 325.2(v) and (x). The "Capital Calculations" schedule in the Report of Examination, page 118 provides the method for determining the ratio of 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 any portion of any increase in Tier 1 capital required herein.

   [.3]3. (a) Within 30 days from the effective date of this Order, the Bank shall establish and shall thereafter maintain, through charges to current operating income, an adequate valuation reserve for loan and lease losses. In determining the adequacy of the valuation reserve for loan and lease losses, the board of directors of the Bank shall at a minimum consider the following:

       (i) Prevailing instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions-Consolidated Reports of Condition and Income";

       (ii) The volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as an analysis of net charge-offs experienced on previously adversely classified loans;

       (iii) The extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of risk associated with such loans;

       (iv) The trend in loan growth, including any rapid increase in loan volume within a relatively short time period;

       (v) General and local economic conditions affecting the collectibility of the Bank's loans;

       (vi) Previous loan loss experience by loan type, including the trend of net charge-offs as a percent of average loans over the past several years;

       (vii) Off balance sheet credit risks;

       (viii) The overall risk associated with each concentration of credit together with the degree of risk associated with each related individual borrower; and

       (ix) Any other factors appropriate in determining future valuation reserves.

   (b) Prior to the submission of any Report of Condition or Report of Income, the board of directors of the Bank shall review the adequacy of the Bank's valuation reserve for loan and lease losses. The minutes of the board meetings at which each review is undertaken shall indicate the results of the review, the amount of any increase to the reserve, and the basis for the amount of the valuation reserve. The criteria for the review shall be as set forth in Paragraph 3(a).

   (c) In the event that the Regional Director and/or the Commissioner determine, at subsequent examinations and/or visitations, that the Bank's valuation reserve for loan and lease losses is inadequate, the Bank shall amend its Consolidated Reports of Condition and Income.

   [.4]4. (a) Within 30 days from the effective date of this ORDER, the Bank shall review all Consolidated Reports of Condition and Income filed with the FDIC on and after March 31, 2002, and shall amend and file with the FDIC amended Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the date of each such Report.

   (b) In addition to the above and during the life of this ORDER, the Bank shall file with
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   the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the reporting period. In particular such Reports shall include any adjustment in the Bank's books made necessary or appropriate as a consequence of any State or FDIC examination of the Bank during that reporting period.

   [.5]5. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt and implement a written ethics policy and procedures designed to set out the ethical conduct, standards and responsibilities of the Bank's directors, officers, employees, principal shareholders, agents or other persons participating in the conduct of the Bank's affairs ("Ethics Program.") At a minimum the Ethics Program shall:

   (a) Address ethical and other conduct or responsibilities of individuals with indebtedness to the Bank;

   (b) Identify economic interests and obligations which appear to conflict with the individuals' duties and responsibilities at the Bank;

   (c) Ensure that each member of the board has been apprised of any potential conflict prior to taking any action on matters brought before the board.

   (d) Ensure that the Bank's officers and directors are specifically excluded from acting on any loan or other transaction in which they and/or their business associates are, directly or indirectly, involved.

   (e) Require that results of board deliberations as to potential conflicts be reflected in the minutes of the meeting and that, in the case of an actual conflict of interest, the interested party abstains from all deliberations and voting on the matter. The abstention shall be reflected in the minutes of the meeting; and

   (f) Appoint an ethics counselor or committee who shall review compliance with the Ethics Program and report its findings to the board of directors.

   [.6]6. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of June 30, 2002, that have not been previously collected or charged off. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.

   (b) Within 60 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director and the Commissioner for review and approval a written plan of action directed at reducing the Bank's risk position in each line of credit or other asset which was classified "Substandard" as of June 30, 2002, and which aggregated $100,000 or more. Such plan shall include but not be limited to, the following:

       (i) Target dollar levels to which the Bank will reduce each line of credit or other asset within three months, six months, and twelve months from the effective date of this ORDER; and

       (ii) Provide for the submission of monthly written progress reports under this Paragraph 5(b) to the Bank's board of directors for review and recordation in the board minutes.

   (c) Within 90 days from the effective date of this ORDER, the Bank shall sufficiently reduce or otherwise improve assets subject to Special Mention as of June 30, 2002 to warrant removal from the Special Mention category.

   (d) As used in Paragraphs 5(b) and (c), the word "reduce" means (i) to collect, (ii) to charge off, or (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.

   [.7]7. (a) Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss" or "Doubtful" and is uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.

   (b) Beginning with the effective date of this ORDER, the Bank shall not make any further extensions of credit, directly or indirectly, to any borrower whose loans are adversely classified "Substandard" as of June 30, 2002, without prior approval by the Bank's board of directors after the board's affirmative determination, as reflected in the minutes of the meeting, that the extension of credit is in full compliance with the Bank's loan policy, that the extension of
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   credit is necessary to protect the Bank's interest or is adequately secured, that credit analysis has determined the customer to be creditworthy, and that all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title and lien documents.

   (c) As used in this paragraph, the term "further extension of credit" shall include renewals, extensions, and a further advancement of funds.

   [.8]8. (a) Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Bank's lending function, which policies shall:

       (i) Include specific guidelines for placing loans on a nonaccrual basis which shall conform with the requirements contained in the Instructions for Preparation of Reports of condition and Income published by the Federal Financial Institutions Examination Council;

       (ii) Include specific procedures for prior approval of loans to directors, officers and principal shareholders and their related interests in compliance with applicable laws and regulations;

       (iii) Establish, consistent with safe and sound banking practices, required loan documentation; appropriate repayment programs; appropriate collection and charge-off procedures, and provide for an internal loan review program;

       (iv) Include specific procedures for tracking and reporting loans that do not meet the Bank's approved loan-to-value ratio;

       (v) Include specific criteria for extending or renewing a loan, and the number of times a loan may be renewed or extended;

       (vi) Include specific parameters for the capitalization of accrued interest;

       (vii) Include specific guidelines for the Bank's purchase or sale of loan participations; and

       (viii) Include specific parameters for the Bank's loans to automobile dealers and floor plan financing; and

       (ix) Provide for the establishment and adherence to realistic amortization programs.

   (b) Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   (c) Beginning with the effective date of this ORDER, the Bank shall initiate and implement a program to strengthen its credit files and correct the technical exceptions as detailed in the Report of Examination pages 111-117. In all future operations, the Bank shall ascertain that all documents or evidence thereof, properly completed, are obtained before credit is extended.

   [.9]9. (a) Within 90 days of the effective date of this ORDER, the board shall establish an effective internal loan review and grading system ("System") to periodically review the Bank's loan portfolio and identify and categorize problem credits. At a minimum the System shall provide for:

       (i) The identification of the overall quality of the loan portfolio;

       (ii) The identification and amount of each delinquent loan;

       (iii) The identification or grouping of loans that warrant the special attention of management;

       (iv) For each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the reason(s) why the particular loan merits special attention;

       (v) An identification of credit and collateral documentation exceptions;

       (vi) The identification and status of each violation of law, rule or regulation;

       (vii) The identification of loans not in conformance with the Bank's lending policy, and exceptions to the Bank's lending policy;

       (viii) The identification of insider loan transactions; and

       (ix) A mechanism for reporting periodically, no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.

   (b) A report shall be submitted to the board quarterly, as well as documentation of the action taken by the Bank to collect or strengthen assets identified as problem credits. The quarterly internal loan review and
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   grading report shall be kept with the minutes of the board of directors.

   [.10]10. Within 60 days from the effective date of this ORDER, the Bank's board of directors shall establish and appoint a loan committee to review and approve in advance all extensions of credit, and/or renewals that when aggregated with all other extensions of credit to that borrower, either, directly or indirectly, exceed or would exceed $200,000. The review should include financial, income, and cash flow information, collateral values and lien information, repayment terms, past performance by the borrower, the purpose of the extension, and whether the extension complies with the Bank's loan policy and applicable laws, rules and regulations. The loan committee shall meet at least twice monthly and shall maintain written minutes which detail the information reviewed by the loan committee, its conclusions, approvals, denials, recommendations, and reasons for the approval of any credit which does not fully comply with the review requirements set forth in this paragraph. At least monthly, the loan committee shall submit its written minutes to the board of directors. The majority (51% or more) of the members of the loan committee shall be independent, outside directors as defined in Paragraph 1(f) of this ORDER.

   [.11]11. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law, regulations and contraventions of policy which are set out in the Report of Examination, of the Bank as of June 30, 2002, pages 46-66. In addition, the Bank shall henceforth comply with all applicable laws, regulations, and policies.

   [.12]12. (a) Within 90 days from the effective date of this ORDER, the Bank shall cause a comprehensive external audit of its financial statements and a review of its internal controls to be performed by an independent public accounting firm acceptable to the Regional Director and Commissioner.

   (b) The Bank shall provide the Regional Director and Commissioner with a copy of the proposed engagement letter with the accounting firm for review prior to execution. The engagement letter shall, at a minimum, include:

       (i) A description of the work to be performed under the engagement letter;

       (ii) The qualifications of the employee(s) who are to perform the work;

       (iii) Any restrictions on the use of the reported findings;

       (iv) A requirement for the generation of written reports; and

       (v) A provision for unrestricted examiner access to work papers.

   (c) Within 10 days of the Bank's receipt of any external audit reports generated by the auditor, the Bank shall submit copies of the reports to the Regional Director and Commissioner for review and comment.

   (d) Within 30 days from the receipt of any comments and after consideration of the comments, the board of directors shall adopt and implement written policies and procedures to correct the noted internal routines and controls deficiencies.

   [.13]13. (a) Within 90 days from the effective date of this ORDER, the Bank shall engage the services of an external auditor to conduct an audit of the Bank specifically designed to detect fraudulent activity.

   (b) The Bank shall provide the Regional Director and Commissioner with a copy of the proposed engagement letter for review prior to execution. The engagement letter shall, at a minimum, include:

       (i) A description of the work to be performed under the engagement letter;

       (ii) The qualifications of the employee(s) who are to perform the work;

       (iv) A requirement for the generation of written reports; and

       (v) A provision for unrestricted examiner access to work papers.

   (c) The Bank shall forward a copy of the audit report it receives to the Regional Director and Commissioner within 10 days from its receipt of the report.

   [.14]14. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt, and implement a written policy satisfactory to the Regional Director and the Commissioner, to ensure that the Bank and its holding company do not engage in transactions or payment of funds which may violate sections 23A or 23B of the Banking Affiliates Act of 1982, 12 U.S.C. §§ 371c and 371c-1. The policy shall limit the payment of any management, consulting, or other fees or funds of any nature, directly or indirectly, to or for the benefit of
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   the Bank's holding company to only those fees or funds paid in connection with services performed by the Bank's holding company on behalf of or for the benefit of the Bank. The Bank shall submit the written policy to the Regional Director and Commissioner for review and comment.

   [.15]15. (a) Within 60 days from the effective date of this ORDER, and the first 30 days of each calendar year thereafter, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank for each calendar year. The written profit plan shall include, at a minimum:

       (i) Identification of the major areas 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 profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director and the Commissioner, the board of directors shall approve the written profit plan which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written plan and/or any subsequent modification.

   [.16]16. Within 60 days from the effective date of this ORDER, the Bank shall formulate and adopt 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. The written liquidity and funds management policy shall be submitted to the Regional Director and the Commissioner for review and comment.

   [.17]17. Within 30 days from the effective date of this ORDER, the Bank shall revise or adopt, and implement written policies to provide effective guidance and control over the Bank's information systems, which policies shall:

   (a) Include specific guidelines to address the use of unauthorized or unlicensed software; to address wire transfers, disaster recovery; and consumer date protection and privacy;

   (b) Include specific guidelines to ensure proper segregation of duties of the individuals listed on the Bank's User Access List;

   (c) Include the development of a comprehensive internal audit program for the Bank's information systems; and

   (d) Submit its written information systems policies and guidelines to the Regional Director and the Commissioner for review and comment.

   [.18]18. Within 90 days from the effective date of this ORDER, the Bank shall obtain the services of an independent, external information systems auditor to perform an audit of the Bank's electronic data processing controls. The audit shall be conducted in compliance with the Interagency Policy Statement on External Auditing Programs of Banks and Savings Associations, dated October 25, 1999, as it applies to Information Systems Controls, Financial Institution Letter 96-99. A copy of the completed audit and its results shall be forwarded to the Regional Director and the Commissioner.

   [.19]19. Within 60 days from the effective date of this ORDER, the Bank shall appoint an independent, knowledgeable security officer, who is not involved in the daily operations of the Bank, to administer the security of the Bank's information systems.

   [.20]20. Within 30 days from the effective date of this ORDER, the Bank shall secure a signed copy of its agreement with which — provides the Bank's ATM services.

   [.21]21. While this ORDER is in effect,
{{3-31-03 p.C-5701}}

   the Bank shall not declare or pay any cash dividends on its capital stock without the prior written approval of the Regional Director and the Commissioner.

   [.22]22. While this ORDER is in effect, the Bank shall give written notice to the Regional Director and the Commissioner at such time as the Bank intends to make use of brokered deposits. The notification should indicate how the brokered deposits are to be utilized with specific reference to credit quality of investments/loans and the effect on the Bank's funds position and asset/liability matching. The Regional Director and the Commissioner shall have the right to reject the Bank's plans for utilizing brokered deposits. For purposes of this ORDER, brokered deposits are defined to include any deposits funded by third-party agents or nominees for depositors, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or asserts a right to federal deposit insurance.

   [.23]23. 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, Accounting & Securities Unit, 550 17th Street, N.W., Room F-6043, 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.

   [.24]24. On the forty-fifth day following the end of the first quarter of 2003, and on the fifteenth day of every third month thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making further reports.

   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Bank.

   This ORDER shall become effective 10 days from the date of its issuance.

   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: 2-6-03.



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