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Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders |
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FDIC Enforcement Decisions and Orders
{{01-31-05 p.C-12335.1}} 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 1-25-06; see ¶ [.1] Management—Qualifications Specified [.2] Board of Directors—Training Program Required [.3] Capital—Tier 1 Capital Increase/Maintain [.4] Bank Operations—Employee Compensation Plan Required [.5] Bank Operations—Expense Reimbursement, Policy Required [.6] Ethics—Ethics Program Required [.7] Violations of Law—Corrections of Violations Required [.8] Board of Directors—Internal Loan Review and Grading System—Written Plan Required [.9] Loan Policy—Preparation or Revision of Policy Required [.10] Loans—Extensions of Credit—To Borrowers with Existing Adversely [.11] Loans—Special Mention [.12] Assets—Charge-off or Collection [.13] Loan Loss Reserve—Establishment of or Increase in Required [.14] Profit Plan—Preparation of Plan Required [.15] Bank Operations—Internal Audit [.16] Accountants—Independent Accountant Required [.17] Information Technology Plan—Weekly Report Required [.18] Bank Secrecy Act—Compliance Program [.19] Cease and Desist Orders—Banking Practices Unsafe and
Unsound—Compliance Committee Established by Board
In the Matter of
Cleveland Community Bank, S.S.B. ("Bank"), through its Board of Directors, having been advised of its right to the issuance and service of a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b) and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC") and a representative of the MISSISSIPPI DEPARTMENT OF BANKING AND CONSUMER FINANCE (the "State") dated December 15, 2004, 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 and the State. The FDIC and the State considered the matter and determined that they had reason to believe that the Bank has engaged in unsafe or unsound banking practices and has violated laws and/or regulations. The FDIC and the State, therefore, accepted the CONSENT AGREEMENT and issued the following: ORDER TO CEASE AND DESIST IT IS ORDERED, that the Bank, institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. §1813(u), of the Bank and its successors and assigns, cease and desist from the following unsafe or unsound banking practices and violations of law and/or regulations: (a) Operating with less than satisfactory capital in relation to the kind and quality of assets held by the Bank. (b) Operating the Bank with inadequate earnings to fund growth and augment capital. (c) Operating the Bank with an excessive level of adversely classified loans or assets. (d) Operating the Bank with an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans and leases held, and failing to make provision for an adequate reserve for possible loan losses. (e) Engaging in hazardous lending and lax collection practices. (f) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits. (g) Operating the Bank without adequate supervision and direction by the Bank's board of directors over the management of the Bank to prevent unsafe and unsound banking practices and violations of laws and/or regulations. (h) Operating the Bank with inadequate internal routine and controls procedures, including failing to adequately document business expenses. (i) Operating in violation of sections 215.4, 215.5, 215.6, 215.8 and 215.9 of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§215.4, 215.5, 215.6, 215.8 and 215.9 made applicable to state nonmember banks by section 18(j)(2), 12 U.S.C. §1828(j)(2); in violation of Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. §323; in violation of Part 365 of the FDIC's Rules and Regulations, 12 C.F.R. §365; in violation of Part 326 of the FDIC's Rules and Regulations, 12 C.F.R. §326; in violation of Section 103.29(a) of the Treasury Department's Financial Recordkeeping and Reporting of Currency and Foreign Transactions Regulation, 31 C.F.R. §103.29(a); in contravention of Part 364 of the FDIC's Rules and Regulations, Standards for Safety and Soundness, 12 C.F.R. §364; in contravention of the Interagency Policy Statement on the Allowance for Loan and Lease Losses, FDIC Financial Institution Letter 89–93; in contravention of the Joint Agency Policy Statement on Interest Rate Risk, 61 Fed. Reg. 33169; in contravention of the Uniform Retail Credit {{01-31-05 p.C-12335.3}} Classification and Account Management Policy Statement, 64 Fed. Reg. 6655-01; in contravention of the Interagency Policy Statement on Appraisal and Evaluations Guidelines, FDIC Financial Institution Letter 74–94 (1994), and in violation of Sections 81-1-91, 81-1-101, 81-14-251, and 81-14-255 of the Mississippi Code. 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 after the effective date of this ORDER, the Bank shall have and retain qualified management acceptable to the Regional Director of the Dallas Region-Memphis Area Office ("Regional Director") and the Commissioner of the Department of Banking and Consumer Finance for the State of Mississippi ("Commissioner"). At a minimum, such management shall include: (i) a chief executive officer with a demonstrated ability in managing a bank of comparable size and shall have prior experience in upgrading a low quality loan portfolio; (ii) a senior lending officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Bank's loan portfolio. Such qualified management shall include person(s) who are knowledgeable or have expertise in the areas of: Information Technology, the Bank Secrecy Act, 31 U.S.C. §§5311–5330 and compliance therewith, and meeting the goals set out in the Bank's profit and strategic plans. Such person(s) shall be provided with the necessary written authority to implement the provisions of this ORDER. Bank management, including its board of directors, shall be assessed on its ability to: (i) Comply with the requirements of this ORDER; (ii) Operate the Bank in a safe and sound manner; (iii) Comply with applicable laws and regulations; and (iv) Restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, liquidity, and sensitivity. (b) While this ORDER is in effect, the Bank shall notify the Regional Director and the Commissioner in writing of any changes in any of the Bank's Directors or Senior Executive Officers. For purposes of this ORDER, "Senior Executive Officer" is defined as in Section 303.101(b) of the FDIC Rules and Regulations, 12 C.F.R. §303.101(b). Prior to the addition of any individual to the board of directors or the employment of any individual as a Senior Executive Officer, the Bank shall comply with the requirements of Section 32 of the Act, 12 U.S.C. §1831i, and Subpart F of Part 303 of the FDIC Rules and Regulations, 12 C.F.R. §$sect; 303.100–303.103. (c) Within 120 days after the effective date of this ORDER, the Bank shall increase the number of members on its board of directors so that no less than two-thirds of the board of directors shall be composed of Independent Directors. For purposes of this ORDER, a person who is an Independent Director shall be any individual: (i) who is not an officer or employee of the Bank; (ii) who is not related by blood or marriage to an officer, employee or director of the Bank, and who does not otherwise share a common financial interest with such officer or director; and (iii) who is not indebted to the Bank directly or indirectly by blood, marriage or common financial interest, including the indebtedness of any entity in which the individual has a substantial financial interest in an amount exceeding five percent of the Bank's total Tier 1 capital and Allowance for Loan and Lease Losses; or (iv) who is deemed to be an Independent Director for purposes of this ORDER by the Regional Director and the Commissioner. [.2] 2. Within 12 months after the effective date of this ORDER, each member of the board of directors shall attend at least eight hours of training related to the duties and responsibilities of Bank directors. This training shall be conducted by a recognized organization of bankers or be sponsored and approved by such an organization, and be acceptable to the Regional Director and the Commissioner. [.3] 3. (a) With the effective date of this ORDER and for so long thereafter
as this ORDER is outstanding, the Bank shall achieve and maintain Tier
1 Leverage Capital equal to or greater than seven percent of its
average Total Assets after establishing an
adequate Allowance for Loan and Lease Losses as required herein. (b) If such ratio is less than seven percent as determined by the Regional Director or the Commissioner, the Bank shall, within 30 days after a determination of a capital deficiency, present to the Regional Director and the Commissioner a plan to increase the Tier 1 Leverage Capital of the Bank or to take other measures to bring the ratio to seven percent. After the Regional Director and the Commissioner respond to the plan, the board of directors of the Bank shall adopt the plan, including any modifications or amendments requested by the Regional Director and the Commissioner. (c) Thereafter, to the extent such measures have not previously been initiated, the Bank shall immediately initiate measures detailed in the plan, to increase its Tier 1 Leverage Capital by an amount sufficient to bring the ratio to seven percent within 30 days after the Regional Director and the Commissioner respond to the plan. Any increase in Tier 1 Capital necessary to meet the ratio required by this ORDER may be accomplished by: (i) The sale of securities in the form of common stock; (ii) The direct contribution of cash by the directors and/or members of the Bank or by the Bank's holding company; or (iii) Receipt of an income tax refund or the capitalization of a bona fide tax refund certified as being accurate by a certified public accounting firm; or (iv) Any other method approved by the Regional Director and the Commissioner. (d) If all or part of the increase in Tier 1 Leverage Capital required by this ORDER is to be accomplished by the sale of new securities, the Bank's board of directors shall adopt and implement a plan for the sale of such additional securities, including soliciting proxies and the voting of any shares or proxies owned 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 members), 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 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 and Securities Disclosure Section, 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429, for review. Any changes requested to be made in the plan or the materials by the FDIC shall be made prior to their dissemination. If the increase in Tier 1 Leverage Capital is to be provided by the sale of non-cumulative perpetual preferred stock, then all terms and conditions of the issue shall be presented to the Regional Director and the Commissioner for prior approval. (e) In complying with the provisions of this ORDER and until such time as any such public offering is terminated, 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 change which is materially different from the information reflected in any offering materials used in connection with the sale of the Bank's securities. The written notice required by this paragraph shall be furnished within 10 days after the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber who received or was tendered the information contained in the Bank's original offering materials. (f) For the purpose of this ORDER, the terms "Allowance for Loan and Lease Losses", "Tier 1 Leverage Capital", and "Total Assets" shall be as defined in Part 325 of the FDIC's Rules and Regulations, respectively Sections 325.2(a), (v), and (x), 12 C.F.R. §§325.2(a), (v), and (x). "Average Total Assets" shall be calculated according to the methodology set forth in the June 1, 2004 Report of Examination ("Report of Examination"). The "Capital Calculations" schedule on page 96 of such Report of Examination provides the method for determining the ratio of Tier 1 capital to Part 325 total assets as required by this ORDER. [.4] 4. Within 120 days of the date of this ORDER, and in conjunction with
the Bank's approval of the Management Plan in paragraph 2, the Bank
shall formulate a written
Employee Compensation Plan (the "Compensation Plan"). The Compensation Plan shall provide written guidelines for salary, bonus, board and committee fees, vacation policy, sick leave, paid absences from official duties, and other forms of employee compensation and shall include at a minimum: (a) A requirement that the Bank's board establish a Compensation Committee of no less than three members, all of whom shall be Independent Directors as defined in this ORDER. (b) A requirement that the Compensation Committee shall maintain written minutes of its meetings, including any reports to the board of directors. (c) A requirement that the Compensation Committee meet no less frequently than annually and review current total compensation of each officer and employee; and evaluate the appropriateness of each individual's total compensation; and make recommendations to the full board of directors regarding future compensation for each officer and employee. (d) Establish quantitative criteria for the payment of any bonuses and require that any bonus be approved prior to being paid or otherwise expensed by the Bank. (e) Within 120 days after the effective date of the ORDER, the Compensation Plan shall be submitted to the Regional Director and the Commissioner for review and comment. Within 30 days from the receipt of any such comments from the Regional Director and the Commissioner, and after adoption of any recommended changes, the Bank shall approve the policy, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank shall implement and follow the policy. [.5] 5. (a) Within 30 days after the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director and the Commissioner, for review and comment, a written policy covering expense reimbursements to its directors, officers, and employees (the "Expense Reimbursement Policy"). At a minimum, the Expense Reimbursement Policy shall include: (i) Guidelines which specify authorized categories of expenses eligible for Bank reimbursement; (ii) Provisions which require complete documentation of all expenses related to customer entertainment and business development prior to Bank reimbursement. At a minimum, the Bank shall require the submission of original receipt(s), identification of the person(s) entertained, and the business purpose of the expense; and (iii) Provisions which prohibit the reimbursement of personal expenses of the Bank's directors, officers, and employees. (b) While this ORDER is in effect, the Bank's board of directors shall conduct monthly reviews of all expenses submitted for customer entertainment, business development, and/or any other expense submitted by the Bank's officers, directors and employees, with the results of the reviews stated in the minutes of the meetings of the board of directors at which such reviews are performed. On a monthly basis, the Bank shall either seek reimbursement for any expenses paid which are not in conformance with the policy established pursuant to this paragraph or shall state in the minutes of the board of directors' meeting the full justification for deviations from the policy. If any expenses are paid that are not or have not been deducted on the Bank's tax return then the Bank shall issue the appropriate W-2 statement on that payment to the employee. (c) Within 30 days after the effective date of this ORDER, the Expense Reimbursement Policy shall be submitted to the Regional Director and the Commissioner for review and comment. Within 30 days from the receipt of any such comments from the Regional Director and the Commissioner, and after adoption of any recommended changes, the Bank shall approve the policy, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank shall implement and follow the policy. (d) Within 60 days of the effective date of the ORDER, the board of
directors shall review all officer, director and employee expenses
previously directly paid or reimbursed by the Bank between January 1,
2003 and the effective date of this ORDER, including any country club
billings, to determine whether such expenses were for appropriate Bank
purposes and whether adequate documentation for such expenses was
submitted. The results of the review shall be stated in the minutes of
the meeting of the board of directors at which such review was
performed. The Bank shall either seek reimbursement for any expenses
paid which
are determined not to be appropriate or shall state in the minutes of the board of directors' meeting the full justification for deviations for not seeking reimbursement. If any expenses are paid that are not or have not been deducted on the Bank's tax return, then the Bank shall issue the appropriate W-2 statement on that payment to the employee. [.6] 6. Within 60 days after the effective date of this ORDER, the Bank shall develop, adopt, and implement a written ethics policy and procedure with regard to the ethical conduct and other standards of conduct and responsibilities for its directors, officers, employees, agents, and other persons participating in the conduct of the affairs of the Bank ("Ethics Program"). At a minimum, the Ethics Program shall address the following: (a) Ethical and other conduct and responsibilities of individuals in the use of official Bank information; preferential treatment for Bank employees or their relatives; and indebtedness to the Bank or any other financial institution. (b) Compliance with all applicable laws and regulations, including Regulation O of the Board of Governors of the Federal Reserve System. (c) The financial interests and obligations of individuals that appear to conflict with that individual's duties and responsibilities such as participating in any manner in any transaction or loan in which the individual, his spouse, child, partner, or organization is involved; or in which the individual serves as an officer, director, trustee, partner, or employee, or has a financial interest or has been granted a power of attorney. (d) An annual acknowledgement of the Ethics Program executed by each director, officer, employee, agent or other persons participating in the conduct of affairs of the Bank, together with certification of such individual's compliance with the Ethics Program. (e) Written policies and procedures designed to bring to the attention of each member of the board conflicts of interest which may exist in approving loans or other transactions in which officers or directors of the Bank ("Insiders") are involved. Such policies and procedures shall, at a minimum, ensure that each member of the board has been apprised of any potential conflict prior to making a decision and has acted specifically on any loan or other transaction in which Insiders and/or their business associates are, directly or indirectly, involved. The results of the board deliberations, as to potential conflicts, shall be reflected in the minutes of the board's meeting. (f) Within 60 days after the effective date of this ORDER, the Bank shall submit the Ethics Program to the Regional Director and the Commissioner for review and comment. Within 30 days from the receipt of any such comments from the Regional Director and the Commissioner, and after adoption of any recommended changes, the Bank shall approve the Ethics Program, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank shall implement and follow the Ethics Program. [.7] 7. (a) Within 30 days after the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulation noted in the Report of Examination. (b) Within 30 days after the effective date of this ORDER, the Bank shall address any contraventions of policy noted in the Report of Examination. (c) Within 30 days after the effective date of this ORDER, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations. (d) For any NSF and overdraft fees noted in the Report of Examination
as constituting a violation of Federal Reserve Board Regulation O, the
board shall require reimbursement from the executive officer or
director using the Bank's deposit agreement requirements as the
standard. The full board of directors shall review and approve all
reimbursement calculations and dollar amounts before such reimbursement
is made. The board shall also require reimbursement by the executive
officer or director of all interest on loans listed as Regulation O
violations due to the interest rate on the loan having been lowered as
noted in the Report of Examination after review and approval of all
reimbursement calculations by the board. The results of the review
shall be stated in the minutes of the meeting of the board of directors
at which such review is performed.
[.8] 8. (a) Within 60 days after 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) An identification or grouping of loans that warrant the special attention of management; (iv) For each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the 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) An identification of loans not in conformance with the Bank's lending policy and exceptions to the Bank's lending policy; (viii) An identification of insider loan transactions; and (ix) A mechanism for reporting periodically, 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 copy of the reports submitted to the board, as well as documentation of the action taken by the Bank to collect or strengthen assets that warrant the special attention of management shall be kept with the minutes of the board of directors. (c) Within 60 days after 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 $100,000. 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. At least two-thirds of the members of the Loan Committee shall be independent as defined in this ORDER. [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall review its written loan policy and make whatever changes may be necessary to provide for the safe and sound administration of all aspects of the lending function. Proper and adequate loan documentation or evidence thereof, as is required by sound banking practices before disbursement of the loan proceeds to borrowers or before renewal or extensions of existing loans, shall be part of the review. Such policy shall provide for identification of primary and secondary sources of repayment, the establishment of and adherence to realistic amortization programs, and proper and adequate loan documentation or evidence thereof as is required by sound banking practices before dissemination of the loan proceeds to borrowers or before renewal or extensions of existing loans. Evidence of the review and establishment of procedures to ensure compliance with the loan policy shall be reduced to writing. Such written loan policy 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 Regional Director and/or the Commissioner, the board of directors shall approve the written loan policy, 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 loan policy and/or any subsequent modification. 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. [.10] 10. (a) While this ORDER is in effect, the Bank shall not extend,
directly or indirectly, any additional credit to or for the benefit of
any borrower whose existing credit
has been classified Loss by the FDIC or the State as the result of its examination of the Bank, either in whole or in part, and is uncollected, or to any borrower who is already obligated in any manner to the Bank on any extension of credit, including any portion thereof, that has been charged off the books of the Bank and remains uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing credit already extended to a borrower after full collection, in cash, of interest due from the borrower. (b) While this ORDER is in effect, the Bank shall not make any further extensions of credit to any borrower thereof whose loans in the aggregate exceed $50,000 and are adversely classified "Substandard" as of June 1, 2004 unless such extension has been approved in advance by a majority of the Bank's board of directors and the board has detailed in the written minutes of the meeting how it has affirmatively determined all of the following: (i) That the extension of credit is in full compliance with the Bank's loan policy; or (ii) That it is necessary to protect the Bank's interest or that the extension of credit is adequately secured; and (iii) That based upon credit analysis the customer is deemed to be creditworthy; and (iv) That all necessary loan documentation is on file, including current financial and cash flow information and satisfactory appraisal, title, and lien documents. (c) The minutes shall also include the following information about the extension of credit: (i) The amount adversely classified as of June 1, 2004; (ii) The current balance; (iii) The amount of credit requested and a description of why the additional credit is in the best interest of the Bank; (iv) A description of the collateral and its value securing the credit; and (v) A full description of the documentation presented to the board of directors, including the date of the borrower's most recent financial information and the borrower's current income or cash flow data. [.11] 11. (a) Within 60 days after the effective date of this ORDER, the Bank shall correct all deficiencies in the loans listed for "Special Mention" in the Report of Examination. (b) Within 60 days after 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 on pages 91 through 95 of the Report of Examination. In all future operations, the Bank shall ascertain that all documents or evidence thereof, properly completed, are obtained before credit is extended. (c) Within 60 days after the effective date of this ORDER, the Bank shall implement a system of monitoring loan documentation exceptions on an ongoing basis and implement procedures designed to reduce the occurrence of such exceptions in the future. [.12] 12. (a) Within 30 days after the effective date of this ORDER, the Bank shall, to the extent that it has not previously done so, eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss by the FDIC and the State as a result of its examination of the Bank as of June 1, 2004. The Bank shall not rebook such loans without the prior written consent of the Regional Director and the Commissioner. Elimination or reduction of these assets through proceeds of loans made by the Bank shall not be considered "collection" for the purpose of this paragraph. (b) Within 60 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner to reduce the remaining assets classified Substandard as of June 1, 2004. The plan shall address each asset so classified with a balance of $100,000 or greater and provide the following: (i) The name under which the asset is carried on the books of the Bank; (ii) Type of asset; (iii) Actions to be taken in order to reduce the classified asset; and (iv) Timeframes for accomplishing the proposed action; (v) A review of the financial position of each such borrower, including the source of repayment, repayment ability, and alternate repayment sources; and (vi) An evaluation of the available collateral for each such credit, including possible {{01-31-05 p.C-12335.9}} actions to improve the Bank's collateral position. (c) The Bank shall present the plan to the Regional Director and the Commissioner for review. Within 30 days after the Regional Director and the Commissioner's response, the plan, including any requested modifications or amendments shall be adopted by the Bank's board of directors. The Bank shall then immediately initiate measures detailed in the plan to the extent such measures have not been initiated. (d) While this ORDER is in effect, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as determined at any future examination conducted by the FDIC or the State. [.13] 13. (a) Within 30 days of the effective date of this ORDER, if not already accomplished, the Bank shall make provisions to its Allowance for Loan and Lease Losses in the amount of at least $455,000. The allowance should be funded by charges to current operating income, and should be calculated in accordance with generally accepted accounting standards and ALLL supervisory guidance. (b) The Bank 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 percentage 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. (c) 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 13(b). (d) In the event that the Regional Director and the Commissioner determine, at subsequent examinations 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. (e) The requirements of Paragraph 13 above are not to be construed as a standard for future operations. [.14] 14. (a) Within 90 days after the effective date of this ORDER, and within 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 in, and means by, which the board of directors will seek to improve the Bank's operating performance; (ii) Realistic and comprehensive budgets; (iii) A budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections on not less than a quarterly basis; and (iv) A description of the operating assumptions that form the basis for, and adequately {{01-31-05 p.C-12335.10}} 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 or the Commissioner, the board of directors shall approve the written profit plan, which approval shall be recorded in the board's minutes. Thereafter, the Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification. [.15] 15. (a) Within 90 days after the effective date of this ORDER, the Bank's board of directors shall implement an effective program for internal audit and control consistent with the size and complexity of the Bank. The audit program shall provide procedures to test the validity and reliability of operating systems, procedural controls, and resulting records, and shall comply with the Interagency Policy Statement on the Internal Audit Function and its Outsourcing. (b) The internal auditor shall report no less frequently than quarterly to the Bank's board of directors. The report and any comments made by the directors regarding the internal auditor's report shall be noted in the minutes of the Bank's board meeting. [.16] 16. (a) Within 60 days after the effective date of this ORDER, the Bank shall engage an independent public accounting firm acceptable to the Regional Director and the Commissioner to perform an external audit of its financial statements and a review of its internal controls. Such audit shall be completed within 180 days after the effective date of this ORDER. (b) Within 60 days after the effective date of this ORDER, the Bank shall provide the Regional Director and the Commissioner with a copy of the proposed engagement letter with the accounting firm for review before it is executed. The engagement letter, at a minimum, should include: (i) A description of the work to be performed under the engagement letter; (ii) Provision for direct verification of a representative sample of the types of loans contained in the Bank's loan portfolio; (iii) The responsibilities of the accounting firm; (iv) An identification of the professional standards covering the work to be performed; (v) Identification of the specific procedures to be used when carrying out the work to be performed; (vi) The qualifications of the employee(s) who are to perform the work; (vii) The time frame for completion of the work; (viii) Any restrictions on the use of the reported findings; and (ix) A provision for unrestricted examiner access to work papers. (c) While this ORDER is in effect, the Bank shall forward copies of any external audit reports it receives to the Regional Director and the Commissioner for review and comment within 45 days of receipt of the audit report. [.17] 17. Within 90 days after the effective date of this ORDER, the Bank shall take all steps necessary to improve the management of the Bank's Information Technology (IT) activities and correct each deficiency cited in internal audit reports, the Report of Examination or any subsequent Report of Examination. (a) Within 30 days after the effective date of this ORDER, the board shall strengthen network password administration to include activating the Active Directory password complexity requirement; enabling audit logging after discussing appropriate default setting with the vendor; and restrict assignment of Administrator access to an absolute minimum. (b) Within 90 days after the effective date of this ORDER, the board shall fully comply with Guidelines Establishing Standards for Safeguarding Customer Information ("Guidelines"), Appendix B, Part 364 of FDIC Rules and Regulations, implementing Section 501(b) of the Gramm-Leach-Bliley Act. This will include conducting employee training pertaining to the Guidelines; testing all key controls; establishing oversight programs to monitor service providers; and requiring management to submit an annual report to the board on the overall status of the information security program and management's compliance with the Guidelines. (c) Within 90 days after the effective date of this ORDER, the board
shall implement a written IT audit program, which shall, at a minimum,
accomplish the following:
(i) Undertaking an annual IT audit with a scope that is appropriate for the size, complexity, and profile of the Bank; (ii) Selecting a qualified firm or individual who has the knowledge, expertise and capability to perform sound IT audits; and (iii) Tracking and monitoring audit and examination findings and submitting regular, written, reports to the board of directors. (d) Within 90 days after the effective date of this ORDER, the board shall develop and implement an incident response plan which will: (i) Establish the responsibilities of all participants involved; (ii) Detail evaluation and increased response procedures once an incident is detected; (iii) Set up the response capabilities that must be maintained by the Bank; (iv) Record the response procedures that must be followed for each incident; (v) State the response priorities; and (vi) List the external coordination that must be completed to effectively respond. (e) Within sixty days after the effective date of this ORDER, the board shall execute a written contract for item capture and encoding services presently provided without benefit of a written agreement. The contract should contain the responsibilities of all participants involved, require the service provider to implement appropriate measures designed to meet the objectives of the Guidelines, establish ownership of generated and input information, and assert the right of the Bank to review audits, summaries of test results or other equivalent evaluations of the service provider. [.18] 18. (a) Within 60 days after the effective date of this ORDER, the Bank shall provide for an acceptable written Bank Secrecy Act ("BSA") Compliance Program. The BSA Compliance Program 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 BSA Compliance Plan. Such approval shall be recorded in the board's minutes. The BSA Compliance Program shall be implemented immediately to the extent that its provisions are not already in effect at the Bank. (b) The BSA Compliance Program shall be designed to reasonably assure ongoing compliance with 31 C.F.R. Part 103 (Financial Recordkeeping), 12 C.F.R. Section 326.8 (Bank Secrecy Act Compliance), 12 C.F.R. Part 353 (Suspicious Activity Reports), and the guidance set forth in Financial Institution Letter 29-96 (May 14, 1996). (c) The BSA Compliance Program shall provide for an effective system of internal controls to assure ongoing compliance with the BSA. The system of internal controls should include, at a minimum, steps designed to: (i) Identify reportable transactions and gather the information necessary to properly complete the required reporting forms; (ii) Ensure that all required reports are accurate, proper, complete, and timely filed; (iii) Ensure that customer exceptions are properly granted and documented; and (iv) Provide for separation of duties to ensure personnel completing required reports are not responsible for filing them. (d) The board of directors shall appoint a Bank official who meets the qualifications set forth in Financial Institution Letter 29-96 (May 14, 1996), to coordinate and monitor the Bank's compliance with the BSA. This individual shall have the authority to make and enforce policies to ensure compliance with the BSA. (e) The Bank shall implement a training program covering 31 C.F.R. Section 103, for all appropriate personnel. This training shall be completed within 90 days after the effective date of this ORDER. Employees receiving the training shall include, but not be limited to, all current or new employees employed by the Bank as tellers, new accounts personnel, lending personnel, bookkeeping personnel and wire transfer personnel. The training program should also ensure that senior Bank management and the board of directors are informed of any changes to, or developments in, the BSA and the Bank's responsibility thereunder. (f) Within 90 days after the effective date of this ORDER, and at least
annually thereafter, the Bank shall independently test the BSA
Compliance Program to ensure proper controls are in place to comply
with the requirements of 31 C.F.R. Part 103, 12 C.F.R.
Section 326.8, and 12 C.F.R. Part 353. The independent test should be completed by a qualified person or entity independent of the Bank's BSA Compliance Program. The independent testing program should, at a minimum: (i) Test the Bank's internal procedures for monitoring compliance with the BSA, including interviews of employees who handle cash transactions; (ii) Sample the large currency transactions followed by a review of the currency transaction report findings; (iii) Test the validity and reasonableness of the customer exemptions granted by the Bank; (iv) Test the Bank's recordkeeping system to ensure compliance with 31 C.F.R. Part 103 and 12 C.F.R. Part 353; and (v) Document the scope of the testing procedures performed and the findings of the test. (g) The results of each independent test, as well as any apparent exceptions noted during the testing, shall be presented to the board of directors. The board shall record the steps taken to correct any exceptions noted, and address any recommendations made during the independent test in the board's minutes. [.19] 19. Within 30 days after the effective date of this ORDER, the Bank's board of directors shall establish a committee of the Bank's board charged with the responsibility of ensuring 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 in this ORDER. The committee shall report to the full board of directors of the Bank and a copy of the report and any discussion relating to the report or the ORDER shall be noted in the minutes of the Bank's board of directors' meetings. The establishment of this subcommittee shall not diminish the responsibility or liability of the entire board of directors of the Bank to ensure compliance with the provisions of this ORDER. 20. Following the effective date of this ORDER, the Bank shall furnish a description of this ORDER in conjunction with the Bank's next members meeting. The description shall fully describe the ORDER in all material respects. 21. Within 30 days from the end of each calendar quarter following the effective date of this ORDER, the Bank shall furnish to the Regional Director and the Commissioner, written progress reports signed by each member of the Bank's board of directors, detailing the actions taken to secure compliance with the ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished, and the Regional Director and the Commissioner have released, in writing, the Bank from making further reports. The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, successors, assigns, and other institution-affiliated parties of the Bank. This ORDER shall be effective 10 calendar 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: December 15, 2004.
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Last Updated 5/5/2006 | legal@fdic.gov |
