Federal Deposit
Insurance Corporation

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   [¶10,716] In the Matter of Garden State Bank, Jackson Township, New Jersey, Docket No. FDIC-93-28b (2-11-93).

   Bank to cease and desist from such unsafe or unsound practices as following hazardous lending and lax collection practices; operating with inadequate capital; operating with an excessive level of poor quality assets; operating with inadequate allowance for loan and lease losses; operating with inadequate liquidity and funds management; operating with inadequate liquidity and funds management; operating without proper internal routine and controls; operating in such a manner as to produce unsatisfactory earnings; operating in violation of applicable laws or regulations; operating with management whose policies are detrimental to the Bank; and failing to provide adequate supervision over the Bank's affairs. (This order was terminated by order of the FDIC dated 8-11-94; see ¶15,903.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Allowance for Loan and Lease Losses—Establish/Maintain
   [.5] Budget and Earnings Plan—Preparation Required
   [.6] Ethics—Written Program—Compliance Review
   [.7] Assets—Adversely Classified—Eliminate/Reduce
   [.8] Assets—Adversely Classified—Eliminate/Reduce—Schedule
   [.9] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.10] Assets—Criticized—Individual Plans Required
   [.11] Lending and Collection Policy—Minimum Requirements
   [.12] Loans—Internal Review Procedure—Minimum Requirements
   [.13] Violations of Law—Eliminate/Correct
   [.14] Liquidity and Funds Management—Policy Required
   [.15] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.16] Loans—Special Mention—Correct Deficiencies
   [.17] Dividends—Restricted
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   [.18] Compensation—Executives—"Golden Parachutes" Restricted
   [.19] Brokered Deposits—Acceptance Limited
   [.20] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

GARDEN STATE BANK
JACKSON TOWNSHIP, NEW JERSEY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-93-28b
   Garden State Bank, Jackson Township, New Jersey ("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 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"), dated February 11, 1993, 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. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS HEREBY ORDERED that the Bank, its successors, assigns, directors, officers, employees, agents, and other "institution-affiliated parties," as defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), CEASE AND DESIST from the following unsafe or unsound banking practices and violations:

   (a) Engaging in hazardous lending and lax collection practices;
   (b) Operating the Bank with inadequate capital in relation to the kind and quality of assets held by the Bank;
   (c) Operating the Bank with an excessive volume of poor quality assets;
   (d) Operating the Bank with an inadequate allowance for loan and lease losses;
   (e) Operating the Bank with inadequate liquidity and funds management;
   (f) Operating the Bank with inadequate internal routine and controls;
   (g) Operating the Bank in such a manner as to produce unsatisfactory earnings;
   (h) Engaging in violations of applicable Federal and State laws and/or regulations, as more fully set forth on pages 6-a through 6-a-10 of the Report of Examination of the Bank by the FDIC as of June 15, 1992;
   (i) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits; and
   (j) Operating the Bank with a board of directors which has failed to provide adequate supervision over and direction to the operating management of the Bank.
   IT IS FURTHER ORDERED that the Bank take AFFIRMATIVE action as follows:

   [.1] 1. (a) Within 90 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 implementing and maintaining lending policies and other Bank policies in accordance with sound banking practices.
   (b) During the life of this ORDER, the Bank shall notify the Regional Director of the New York Regional Office of the FDIC ("Regional Director") and the Commissioner of Banking ("Commissioner") for the State of New Jersey Department of Banking ("Department") in writing of any resignations and/or terminations of any members of its board of directors and/or any of its officers.
   (c) The Bank shall comply with section 32 of the Act, 12 U.S.C. § 1831i, which includes a requirement that the Bank shall
{{4-30-93 p.C-3001}}notify the Regional Director in writing at least 30 days prior to any individual assuming a new position or any additions to its board of directors and/or senior executive officers.

[.2] 2. (a) Within 90 days from the effective date of this ORDER, the board of directors of the Bank shall review and make a written report on the Bank's management needs in the lending area ("Management Report"). The Management Report shall incorporate an analysis of the Bank's management and staffing requirements and shall, at a minimum:

   (i) identify both the number and type of positions needed to properly supervise the Bank's lending functions, giving appropriate consideration to the Bank's loan volume, customer base and the number of problem credits;
   (ii) provide a clear and concise description of the general duties and responsibilities of lending officers and their support staff;
   (iii) identify the skills, experience and pay required for each position;
   (iv) provide an evaluation of the Bank's senior management and lending officials, indicating whether bank officials possess the necessary lending and collection experience and qualifications required to adequately perform present and anticipated duties;
   (v) establish a plan to recruit, hire, and/or replace personnel based on ability and experience;
   (vi) establish a plan providing for periodic evaluation of each individual's job performance; and
   (vii) provide for periodic review of the Bank's management and updating of lending policies and procedures.

   [.3] 3. (a) Within 180 days from the effective date of this ORDER, the Bank shall have adjusted Tier 1 capital equal to or greater than 6.0 percent of the Bank's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Bank shall maintain adjusted Tier 1 capital equal to or greater than 6.0 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 3(a) of this ORDER may be accomplished by the following:
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   (i) the sale of new securities in the form of common stock or noncumulative perpetual preferred stock; or
   (ii) the direct contribution of cash by the directors or parent bank holding company of the Bank; or
   (iii) any combination of the above or other method acceptable to the FDIC.
   (c) If all or part of the increase in Tier 1 capital required by paragraph 3(a) of this ORDER is accomplished by the sale of new securities, the board of directors of the Bank shall forthwith adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of Bank 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 Federal and State securities laws. Prior to the implementation of the plan and, in any event, not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, Washington, D.C. 20429. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination.
   (d) In complying with the provisions of paragraph 3 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph shall be furnished within 10 calendar days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of Bank securities who received or was tendered the information contained in the Bank's original offering materials.
   (e) For the 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 sections 325.2(m) and 325.2(n), 12 C.F.R. §§ 325.2(m) and (n) (to be recodified at 12 C.F.R. §§ 325.2(t) and (v), 57 Fed. Reg. 44866, 44899 (1992); 58 Fed. Reg. ____ (1993)). The "Analysis of Capital" schedule on page 3 of the FDIC Report of Examination provides the method for determining the ratio of adjusted 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 securities or to any investor by any other means for any portion of any increase in Tier 1 capital required herein.

   [.4] 4. (a) Within 30 days from the effective date of this ORDER, the board of directors of the Bank shall adopt a method of computing the balance of the Bank's allowance for loan and lease losses that gives consideration to the volume and composition of the loan portfolio not subject to criticism, as well as to the volume and composition of criticized loans, including but not limited to (1) results of the Bank's internal loan review, (2) loan loss experience, (3) an estimate of potential loss exposure on each significant credit, (4) concentrations of credit in the Bank, and (5) present and prospective economic conditions. Immediately thereafter, the board of directors of the Bank shall review the adequacy of the Bank's allowance for loan and lease losses utilizing the method adopted pursuant to this paragraph, and shall make such additional provisions for loan and lease losses that are necessary to maintain the allowance at an adequate level relative to the volume of risk in the Bank's loan portfolio. Thereafter, the Bank's board of directors shall, during the first month of each quarter, reevaluate the allowance for loan and lease losses and make such additional provisions for loan and lease losses that are necessary to maintain the allowance at an adequate level relative to the volume of risk in the Bank's loan portfolio. All such additional provisions for loan and lease losses shall be made in the first month of the calendar quarter in which the deficiency in the allowance is identified, but as of the end of the preceding calendar quarter, and shall {{4-30-93 p.C-3003}}be reflected in the Report of Condition and the Report of Income filed in the calendar quarter in which the deficiency is identified with respect to the preceding calendar quarter. The minutes of the board of directors of the Bank shall reflect that such reevaluation has been performed, and documentary proof of the method employed in determining the level of the allowance shall be maintained for future regulatory review.
   (b) All increases in the allowance for loan and lease losses, with the exception of recoveries credited directly to the allowance, shall be accomplished by charges to operating earnings through the provision for loan and lease losses.

   [.5] 5. (a) Within 60 days from the effective date of this ORDER, and within the first 30 days of each calendar year thereafter, the board of directors of the Bank shall develop a written earnings plan consisting of goals and strategies for improving the earnings of the Bank for each calendar year. The written earnings 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 support, major projected income and expense components.

   [.6] 6. Within 60 days from 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 institution-affiliated parties ("Ethics Program"). At a minimum the Ethics Program shall address the following:
   (a) Ethical and other conduct and responsibilities of individuals in: the acceptance of gifts, entertainment, favors and loans; the case of the use of official information; the employment of relatives; the use of Bank property; travel expenses; and indebtedness to the Bank or any other financial institution.
   (b) The financial interests and obligations of any individual that appears to conflict with that individual's duties and responsibilities such as:   

   (i) participating in any manner in any transaction or loan in which the individual, his or her 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;
   (ii) purchasing of Bank property;
   (iii) providing goods or services to the Bank; and
   (iv) outside employment and other activities.

   [.7] 7. Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection or charge-off, all assets or portions of assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" by the FDIC as a result of its examination of the Bank as of June 15, 1992, which have not been previously charged off or collected. In addition, and so long as this ORDER remains in effect, the Bank shall, within 30 days from the receipt of any subsequent Report of Examination of the Bank from the FDIC or the Department, eliminate from its {{4-30-93 p.C-3004}}books, by collection or charge-off, all assets or portions of assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" in said Reports of Examination. Elimination of these assets through the use of the proceeds of loans or other extensions of credit made by the Bank does not constitute collection for the purposes of this ORDER.

[.8] 8. (a) Within 180 days from the effective date of this ORDER, the Bank shall reduce the remaining total of all assets classified "Doubtful" and "Substandard" by the FDIC as a result of its examination of the Bank as of June 15, 1992, to not more than 100 percent of Tier 1 capital plus allowance for loan and lease losses, and, within 540 days from the effective date of this ORDER, the Bank shall reduce the remaining total of such assets to not more than 50 percent of Tier 1 capital plus allowance for loan and lease losses. The requirements of this paragraph 8(a) shall not be construed as a standard for future operations of the Bank.
   (b) As used in this ORDER, the work "reduce" means (1) to collect, (2) to charge off, or (3) to improve the quality of adversely classified assets sufficiently to warrant removing any adverse classification, as determined by the FDIC. Reduction of these assets through the use of the proceeds of loans or other extensions of credit made by the Bank does not constitute collection for the purposes of this ORDER.

   (i) the Bank's failure to extend further credit to a charged-off or classified borrower would be substantially detrimental to the best interests of the Bank;
   (ii) the extension of credit fully complies with the requirements of the Bank's written lending and collection policies and procedures which have been revised, adopted, and implemented pursuant to paragraph 11 of this ORDER;
   (iii) any extension of credit to a charged-off borrower in connection with any real estate-related financial transaction, as defined in § 323.2(h), regardless of amount, is supported by a current appraisal of worth which at a minimum complies in all respects with the requirements of Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323;
   (iv) a comparison with the written program adopted pursuant to paragraph 10 of this ORDER shows that the Bank's formal program to eliminate the basis {{4-30-93 p.C-3005}}of criticism of said problem asset is not compromised; and,
   (v) prior to extending any credit to a charged-off borrower, or a classified borrower whose outstanding loans or other extensions of credit exceed $100,000 in the aggregate, a majority of the Bank's full board of directors approves the extension of credit and certifies, in writing, the specific reasons why failure to so act would be substantially detrimental to the best interests of the Bank. A copy of the board's certification shall be maintained in the credit file of the charged-off or classified borrower, and shall also be submitted promptly to the Regional Director and the Commissioner.

   (i) the status of each criticized asset;
   (ii) management's adherence to each written program;
   (iii) the status and effectiveness of each written program; and
   (iv) the need to revise each written program and/or take other actions.

   [.11] 11. 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 and collection functions. 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.

[.12] 12. (a) Within 30 days from the effective date of this ORDER, the board of directors of the Bank shall adopt and implement an internal loan review and grading system for periodically reviewing the Bank's loan portfolio and identifying and categorizing problem credits ("System"). At a minimum, the System shall provide for:

   (i) identifying 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 reasons 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 and regulation;
   (vii) an identification of loans not in conformance with the Bank's lending
{{4-30-93 p.C-3006}}policy, and exceptions to the Bank's lending policy;
   (viii) an identification of insider loan transactions; and
   (ix) a mechanism for reporting periodically, but in any event not less than quarterly, to the board of directors on the status of each loan identified and the actions taken by operating management.

   [.13] 13. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulations, as described on pages 6-a through 6-a-10 of the Report of Examination of the Bank by the FDIC as of June 15, 1992; provided, however, that if within 45 days from the effective date of this ORDER, the Regional Director and the Commissioner issue written statements of nonobjection to a plan eliminating and/or correcting the violations of N.J.S.A. 17:9A-62, the Bank shall correct and/or eliminate such violations as provided in such plan. In addition, the Bank shall take all steps necessary to ensure future compliance with all applicable Federal and State laws and regulations.

   [.14] 14. (a) Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement 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. In addition, such policy shall establish specific guidelines for minimum levels of shorter term investments, as defined therein, to assure compliance with the investment policy's stated goal of providing sufficient liquidity to meet deposit outflows and loan demand without taking significant losses from security sales. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
   (b) Within 60 days from the effective date of this ORDER, the Bank's board of directors shall review all purchases of mortgage-backed securities made since June 30, 1991 to determine whether such purchases were made in compliance with the Bank's existing investment policy, and that policy's stated goal of maintaining a "balanced maturity distribution". A report of this review shall be submitted to both the Regional Director and the Commissioner.

   [.16] 16. Within 60 days from the effective date of this ORDER, the Bank shall take all necessary steps to eliminate all deficiencies noted in all assets scheduled as "Special Mention" by the FDIC as a result of its examination of the Bank as of June 15, 1992, and within 60 days from the receipt of any subsequent Report of Examination from the FDIC or the Department, the Bank shall take the necessary steps to eliminate all deficiencies noted in all assets scheduled as "Special Mention" in each such Report.

   [.17] 17. While this ORDER is in effect, the Bank shall not declare or pay either directly or indirectly any dividends, whether in cash, stock, or otherwise, on any class of its stock, without the prior written consent of the Regional Director and the Commissioner.

   [.18] 18. Immediately upon the effective date of this ORDER, unless specifically provided otherwise in a written communication from the Regional Director, the Bank shall: (a) not enter into any agreements with present and/or former officers of the Bank which constitute "golden parachute payments", as defined in section 18(k)(4) of the Act, 12 U.S.C. § 1828(k)(4); (b) rescind all agreements or portions of agreements with present and/or former officers of the Bank which constitute "golden parachute payments"; (c) cease making any payments to present and/or former officers of the Bank which constitute "golden parachute payments"; and (d) take whatever legal steps are necessary to obtain reimbursement from all present and/or former officers of the Bank of any payments which have already been made to them and which constitute "golden parachute payments".

   [.19] 19. While this ORDER is in effect, the Bank shall not accept, renew, or rollover brokered deposits other than as and to the extent permitted pursuant to section 29 of the Act, 12 U.S.C. § 1813f, as amended, and the FDIC's Rules and Regulations, including section 337.6, 12 C.F.R. § 337.6, as amended and supplemented. For the purposes of this ORDER, the term "brokered deposit" shall have the same meaning as is found in section 337.6(a) of the FDIC's Rules and Regulations, 12 C.F.R. § 337.6(a).

   [.20] 20. 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, Registration and Disclosure Section, 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.
   21. The Bank's board of directors shall appoint a committee composed of at least three Outside Directors, and whose composition is acceptable to the Regional Director and the Commissioner (the "Compliance Committee"), to monitor the Bank'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 Bank's board of directors a written report of its findings, detailing the form, content, and manner of any action taken to secure 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 Bank's board of directors.
   22. By the 30th day after the end of the calendar quarter in which this ORDER is issued, and by the 15th day after the end of every calendar quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form, content, and manner of any actions taken to secure compliance with this ORDER, and the results thereof.
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   The effective date of this ORDER shall be 10 days from the date of issuance.
   The provisions of this ORDER shall be binding upon the Bank, its successors, assigns, directors, officers, employees, agents, and other institution-affiliated parties.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated: February 11, 1993.
   Pursuant to delegated authority.