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FDIC Enforcement Decisions and Orders

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   [12,108] In the Matter of Elderton State Bank, Elderton, Pennsylvania, Docket No. 03-131b (10-7-03).

   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 5-26-04; see ¶16,386.)

   [.1] Management—Qualifications Specified

   [.2] Board of Directors—Written Plan Required

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

   [.4] Violations of Law—Corrections of Violations Required
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   [.5] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required

   [.6] Bank Operations—Internal Review and Control Procedures—Establish

   [.7] Gramm-Leach—Bliley Act (GLBA)—Compliance Required

   [.8] Information Technology Plan—Implementation of Required

   [.9] Compliance Officer—Retain/Give Written Authority

   [.10] Compliance Program—Written Policy Required

   [.11] Golden Parachute Payments—Prohibited

   [.12] Compliance Committee—Establishment Required

   [.13] Progress Report—Written Report Required

In the Matter of
ELDERTON STATE BANK
ELDERTON, PENNSYLVANIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-03-131b

   ELDERTON STATE BANK, ELDERTON, PENNSYLVANIA ("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 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 October 7, 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 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 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 of law and/or regulations:

       (a) engaging in hazardous lending practices;

       (b) operating with inadequate provisions for liquidity;

       (c) operating with inadequate internal routine and controls policies;

       (d) engaging in violations of applicable Federal laws and/or regulations and in contravention of FDIC Statements of Policy and Interagency Guidelines, as more fully set forth on pages 23-32 of the FDIC Report of Examination of the Insured Institution (Risk Management) as of September 30, 2002 ("Report of Examination (Risk Management)");

       (e) operating with management whose policies and practices are detrimental to the Insured Institution and jeopardize the safety of its deposits;

       (f) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Insured Institution; and

       (g) engaging in violations of applicable Federal consumer laws and/or regulations as more fully set forth at pages 9 through 19 of FDIC Report of Examination of the Insured Institution (Compliance) as of


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       January 21, 2003 ("Report of Examination (Compliance)").

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

   [.1]1. (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. 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 asset quality, management effectiveness, liquidity and sensitivity to market risk; and

       (v) Implement an effective compliance program including written policies and procedures, and standards for compliance monitoring, auditing and training.

   (b) During the life of this ORDER, the Insured Institution shall notify the Regional Director in writing of any resignation and/or termination of any members of its board of directors and/or any of its executive officers within 15 days of the event. 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.

   [.2]2. (a) Within 60 days from the effective date of this ORDER, the board of directors shall develop a written analysis and assessment of the composition and functions of the board of directors ("Directors' Plan"), which shall include, at a minimum;

       (i) an evaluation of each member of the board of directors to determine whether those individuals and the board as a whole have the ability, experience, independence, and other qualifications which are necessary to perform the duties of the board, including providing effective oversight and guidance of management and staff to ensure adherence to the board's policies and to maintain the Insured Institution in a safe and sound condition and in compliance with laws and regulations;

       (ii) a written plan of action to enhance the effectiveness of the board by either adding new members to the board with the necessary ability, experience, independence and other qualifications, or requiring additional education and training for existing members of the board, or both;

       (iii) an evaluation of the effectiveness of the reporting currently provided to the board of directors; and

       (iv) a review of the effectiveness of the current board of director committee structure.

   (b) The Directors' Plan and any subsequent modifications thereto shall be submitted to the Regional Director for review and comment within 15 days of completion and/or modification. Within 30 days from the receipt of any comments, and after considering such comments, the board of directors shall approve the Directors' Plan and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the board of directors of the Insured Institution shall implement and follow the Directors' Plan and/or any subsequent modifications thereto.

   [.3]3. Within 60 days from the effective date of this Order, the Insured Institution shall revise, adopt and implement a written lending policy to provide effective guidance and control over the Insured Institution's lending function. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.4]4. 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 and failure to follow or adhere to FDIC Statements of Policy and Interagency Guidelines which are set out on pages 23 through 32 of the Report of Examination (Risk Management) and pages 9 through 19 of the Report of Examination (Compliance). In addition, the Insured Institution shall promptly institute appropriate
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   procedures to ensure that the Insured Institution henceforth complies with all applicable laws and regulations.

   [.5]5. Within 60 days from the effective date of this ORDER, the Insured Institution shall develop or revise, adopt, and implement a written liquidity and funds management policy. Such policy and its implementation shall be a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.6]6. Within 60 days from the effective date of this ORDER, the Insured Institution shall establish and implement internal routine and control policies applicable to all key areas of the Insured Institution's operations, including providing comprehensive and ongoing audit coverage.

   [.7]7. Within 90 days from the effective date of this ORDER, the Insured Institution shall institute procedures to ensure the Insured Institution's compliance with Section 501(b) of the Gramm-Leach-Bliley Act ("GLBA").

   [.8]8. Within 90 days from the effective date of this ORDER, the Insured Institution shall develop appropriate information technology policies covering all aspects of the Insured Institution's technology infrastructure.

   9. Except as otherwise provided in paragraphs 7 and 8 above, within 30 days from the effective date of this ORDER, the Insured Institution shall correct the deficiencies noted on pages 3 through 11 in the January 21, 2003 Information Technology Examination.

   10. Within 60 days from the effective date of this ORDER, the Board of Directors shall:

   [.9] (a) Appoint an experienced compliance officer to oversee and coordinate the Insured Institution's overall consumer compliance function. The Board of Directors shall also ensure that the consumer compliance officer receives training, as soon as practicable, sufficient to effectively oversee and coordinate the Insured Institution's overall consumer compliance function.

   [.10] (b) Approve and adopt a written consumer compliance program that establishes effective operating, auditing and monitoring procedures to ensure compliance with all consumer protection laws, regulations and interagency statements of policy. The program should be reviewed and updated as needed to reflect changes in the Insured Institution's consumer compliance environment. At a minimum, such written consumer compliance program should consist of:

       (i) Written policies and procedures pertaining to consumer compliance laws and regulations;

       (ii) Monitoring procedures such as internal control questionnaires or checklists;

       (iii) A documented training program for personnel including formalized training for new hires and refreshers for all employees;

       (iv) A consumer compliance audit program; and

       (v) Procedures to handle consumer complaints.

   (c) Implement internal compliance audit procedures sufficient to enable the Board of Directors to accurately assess the Insured Institution's adherence to all applicable consumer protection and fair lending laws and regulations. Such internal compliance audit procedures should include an emphasis on ensuring management's effectiveness in following up and resolving any errors or other problems cited during internal audits. All audit findings, deficiencies, and recommendations should be documented, reviewed and addressed in a timely manner. All written audit reports should be reported in detail to the Board of Directors.

   (d) Direct management to conduct a complete file search dating to the examination (Compliance) immediately preceding the examination (Compliance) as of January 21, 2003 to identify all consumers who were charged an appraisal fee for appraisal-related services that were not performed. The Insured Institution shall reimburse all such identified consumers for any fees paid for appraisal services.

   (e) Direct management to conduct a complete review of the loan portfolio to identify all borrowers with properties located in a Special Flood Hazard Area. The Insured Institution shall provide notice to all such identified borrowers of the requirement to obtain and maintain flood insurance, and shall otherwise comply with the requirements of 12 C.F.R. Part 339.

   [.11]11. Immediately upon the effective date of this ORDER, the Insured Institution shall:
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       (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 portion 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 of any payments which have already been made to them and which constitute "golden parachute payments".

   [.12]12. 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, 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.

   [.13]13. On the fifteenth day of the second month following the effective date of this ORDER, and on the fifteenth day of every third month thereafter, the Insured Institution shall furnish written progress reports to the Regional Director 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 Insured Institution in writing from making further reports.

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

   This ORDER shall become effective immediately upon 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:

   10-7-03

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