Federal Deposit
Insurance Corporation

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   [¶10,722] In the Matter of Bank and Trust Company of Old York Road, Willow Grove, Pennsylvania, Docket No. FDIC-93-32b (2-17-93).

   Bank to cease and desist from such unsafe or unsound practices as following hazardous lending and lax collection practices; operating with excessive volumes of adversely classified assets; operating with inadequate allowance for loan and lease losses; operating with inadequate capital; operating with management whose policies are detrimental to the Bank; failing to provide adequate supervision over the Bank's affairs; operating with inadequate liquidity; operating without proper internal routine and controls; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated June 30, 1995. See ¶16,017.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods

{{4-30-93 p.C-3027}}
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] Budget and Earnings Plan—Preparation Required
   [.5] Assets—Adversely Classified—Eliminate/Reduce
   [.6] Assets—Adversely Classified—Eliminate/Reduce—Schedule
   [.7] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.8] Assets—Problem Assets—Individual Written Plans Required
   [.9] Loans— Overdue—Ratio—Reduction Required
   [.10] Lending and Collection Policy—Minimum Requirements
   [.11] Assets—Portfolio—Diversification Required
   [.12] Violations of Law—Eliminate/Correct
   [.13] Liquidity and Funds Management—Policy Required
   [.14] Reports of Condition and Income—Amendment Required
   [.15] Bank Operations—internal Routine and Controls—Written Policy Required
   [.16] Dividends—Restricted
   [.17] Shareholders—Disclosure—Cease and Desist Order
   [.18] Board of Directors—Committee to Review Compliance with Cease and Desist Order

In the Matter of

BANK AND TRUST COMPANY OF
OLD YORK ROAD
WILLOW GROVE, PENNSYLVANIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-93-32b
   Bank and Trust Company of Old York Road, Willow Grove, Pennsylvania ("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 rights 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 16, 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 an excessive volume of poor quality assets;
   (c) Operating the Bank with an inadequate allowance for loan and lease losses;
   (d) Operating the Bank in such a manner as to produce unsatisfactory earnings;
   (e) Operating the Bank with inadequate capital in relation to the kind and quality of assets held by the Bank;
   (f) Operating the Bank with management {{4-30-93 p.C-3028}}whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   (g) 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;
   (h) Operating the Bank with inadequate liquidity and funds management;
   (i) Operating the Bank with inadequate internal routine and controls; and
   (j) Engaging in violations of applicable Federal and State laws and/or regulations, as more fully set forth on pages 6-a through 6-a-3 of the joint Report of Examination of the Bank by the FDIC and the Pennsylvania Department of Banking ("Department") as of February 24, 1992.
   IT IS FURTHER ORDERED that the Bank take AFFIRMATIVE action as follows:

[.1] 1. (a) The Bank 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 Bank. The qualifications of management 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 all applicable laws and regulations; and
   (iv) restore all aspects of the Bank to a safe and sound condition, including capital adequacy, asset quality, management effectiveness, earnings and liquidity.

[.2] 2. (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. Subsequently, within 360 days from the effective date of this ORDER, the Bank shall increase such ratio to at least 6.5 percent. Thereafter, during the life of this ORDER, the Bank shall maintain adjusted Tier 1 capital equal to or greater than 6.5 percent of the Bank's adjusted Part 325 total assets.
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   (b) Any increase in Tier 1 capital necessary to meet the ratio required by paragraph 2(a) of this ORDER may be accomplished by the following:

   (i) the sale of new securities in the form of common stock or non-cumulative 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.

[.3] 3. (a) Within 30 days from the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's allowance for loan and lease losses. This review shall focus particular attention upon: (i) results of the Bank's internal loan review; (ii) loan loss experience; (iii) an estimate of potential loss exposure on each significant credit; (iv) concentrations of credit in the Bank; and (v) present and prospective economic conditions.
   (b) Immediately upon completing the review required by paragraph 3(a) of this ORDER, the Bank's board of directors 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, the factors referenced in paragraph 3(a). 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 art 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 defi- {{4-30-93 p.C-3030}}ciency in the allowance is identified, but as of the end of the preceding calendar quarter, and shall 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.
   (c) 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.

[.4] 4. (a) Within 90 days from the effective date of this ORDER, and within the first 60 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.

[.5] 5. 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 and the Department as a result of their joint examination of the Bank as of February 24, 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 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 extension of the credit made by the Bank does not constitute collection for the purposes of this ORDER.

[.6] 6. (a) Within 360 days from the effective date of this ORDER, the Bank shall reduce the remaining total of all assets and contingent liabilities classified "Doubtful" and "Substandard" by the FDIC and the Department as a result of their joint examination of the Bank as of February 24, 1992, to nor more than 100 percent of Tier 1 capital, and, within 540 days from the effective date of this ORDER, the Bank shall reduce the remaining total of such assets and contingent liabilities to not more than 50 percent of Tier 1 capital. The requirements of this paragraph 6(a) shall not be construed as a standard for future operations of the Bank. In addition to accomplishing the foregoing schedule of reductions, the Bank shall eventually reduce all adversely classified assets and contingent liabilities of the Bank.
   (b) As used in this ORDER, the word "reduce" means (i) to collect, (ii) to charge off, or (iii) to improve the quality of adversely classified assets and contingent liabilities sufficiently to warrant removing any adverse classification, as determined by the FDIC. Reduction of these assets and contingent liabilities through the use of the proceeds of other extensions of credit made by the Bank does not constitute collection for the purposes of this ORDER.

[.7] 7. (a) Immediately upon the effective date of this ORDER, the Bank shall not extend, either directly or indirectly, {{4-30-93 p.C-3031}}any new or additional credit (which, for the purposes of this ORDER, shall include the granting of renewals or extensions, or the capitalizing of accrued interest) to, or for the benefit of, any borrower who is obligated in any manner to the Bank on any extension of credit, or portion thereof, which has been charged off the books of the Bank in whole or in part, or to any affiliate or related interest of, or other person or entity associated with, any such borrower, so long as any portion of such extension of credit, whether or not that portion was charged off, remains uncollected. The provisions of this paragraph 7(a) shall nor apply to the advance of funds by the Bank for the sole purpose of maintaining or protecting the Bank's real estate collateral for any extension of credit, up to a maximum amount of $200,000 in the aggregate for all such advances, with respect to each real estate property securing, in whole or in part, all such extensions of credit.
   (b) Immediately upon the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any new or additional credit to, or for the benefit of, any borrower who is obligated in any manner to the Bark on any extension of credit that has been adversely classified, in whole or in part, by the FDIC and the Department as a result of their joint examination of the Bank as of February 24, 1992, or as a result of any subsequent examination of the Bank by the FDIC or the Department, or to any affiliate or related interest of, or other person or entity associated with, any such borrower ("classified borrower"), so long as such extension of credit remains classified or in uncollected. This paragraph 7(b) shall not prohibit the Bank from renewing all or any part of an extension of credit to a classified borrower who is not subject to the prohibitions of paragraph 7(a) of this ORDER, after collection in cash of interest due on the entire extension of credit. The prohibitions of this paragraph 7(b) shall not apply to any extension of credit to a classified borrower who is not subject to the prohibitions of paragraph 7(a) of this ORDER, if:

   (i) the Bank's failure to extend further credit to a classified borrower would be substantially detrimental to the best interests of the Bank;
   (ii) a comparison with the written program adopted pursuant to paragraph 8 of this ORDER shows that the Bank's formal program to eliminate the basis of criticism of said criticized asset is not compromised; and
   (iii) prior to extending any credit, 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 of directors' certification shall be maintained in the credit file of the classified borrower.

   (i) has been adversely classified or listed for "Special Mention" by the FDIC or the Department as a result of their joint examination of the Bank as of February 24, 1992, or is adversely classified or listed for "Special Mention" by either the FDIC or the Department as a result of any subsequent examination of the Bank; or
   (ii) has been accorded a sub-investment quality rating and/or has been designated a work-out or watch list asset, or some equivalent designation, as the result of an internal asset review and rating procedure performed by the Bank or by another party on behalf of the Bank; or
   (iii) is past due in excess of 120 days and/or has been placed in either a nonaccrual or nonearning status by the Bank; or
   (iv) has been partially charged off.

   (i) the status of each problem asset and contingent liability;
   (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.

[.9] 9. (a) Within 360 days from the effective date of this ORDER, the Bank shall reduce to not more than 5 percent, the ratio of loans on which interest or principal is past due for 30 days or more to gross loans. If the ratio exceeds 5 percent at the end of such period, a written explanation of the reason for such excess and the status of collection efforts on each such past-due loan shall be reflected in the minutes of the board of directors of the Bank and forwarded to the Regional Director.
   (b) Within 360 days from the effective date of this ORDER, the Bank shall reduce to not more than 3.0 percent, the ratio of nonaccrual loans to gross loans, and within 540 days from the effective date of this ORDER, the Bank shall reduce to not more than 1.0 percent the ratio of nonaccrual loans to gross loans. If the ratio exceeds 1.0 percent at the end of such period, a written explanation of the reason for such excess and the status of collection efforts on each such nonaccrual loan shall be reflected in the minutes of the board of directors of the Bank and forwarded to the Regional Director.

[.10] 10. Within 60 days from the effective date of this ORDER, the Bank's board of directors shall revise its written lending and collection policies and procedures to provide effective guidance and control over the lending function of the Bank and shall submit said revised policies and procedures to the Regional Director. At a minimum, said policies and procedures shall include the following:
   (a) Standards for all applications for credit which shall include, at a minimum:

   (i) financial statement requirements;
   (ii) credit analysis requirements;
   (iii) loan purpose statement requirements;
   (iv) identification of repayment sources (primary and secondary);
   (v) realistic repayment plan requirements;
   (vi) collateral requirements; and
   (vii) documentation requirements.

   (i) establishing lending limits for specific officers and loan amounts requiring board of directors approval;
   (ii) establishing appropriate control and periodic review of collateral;
   (iii) setting forth requirements for maintaining current information, including financial data, in credit files;
   (iv) establishing appraisal acid inspection standards, and guidelines for performing reappraisals and reinspections which, at minimum, comply with the requirements of Part 323 of the FDIC's Rules and Regulations;
   (v) standardizing follow-up procedures on maturity and delinquent loans;
   (vi) ensuring that delinquencies are accurately reported to the board of directors on a monthly basis;
   (vii) placing loans on nonaccrual status in accordance with the Instructions for the Consolidated Reports of Condition and Income; and
   (viii) recognizing losses in a timely manner.

   (i) the overall quality of the loan portfolio;
   (ii) the identification, type and amount of problem loans;
   (iii) the identification and amount of delinquent loans;
   (iv) credit and collateral documentation exceptions, and
   (v) the identification and status of violations of law or regulations.

   [.11] 11. Within 90 days from the effective date of this ORDER, the Bank's board of directors shall adopt and implement a plan to increase the diversification of the Bank's asset portfolio. Such plan shall address, among other things, measures to be taken, target ratios to be met, and time frames for reducing the concentrations of credit which are detailed on pages 2-b through 2-b-3 of the joint Report of Examination of the Bank by the FDIC and the Department as of February 25, 1992, to less than 100 percent of Tier 1 capital within 24 months from the effective date of this ORDER.

   [.12] 12. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and/or regulations, as described on pages 6-a through 6-a-2 of the joint Report of Examination of the Bank by the FDIC and the Department as of February 24, 1992. In addition, the Bank shall take all steps necessary to ensure future compliance with all applicable Federal and State laws and regulations.

   [.13] 13. 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 poiicy 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. 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.

[.14] 14. (a) Within 30 days from the effective date of this ORDER, the Bank shall review all Reports of Condition and Income filed with the FDIC on and after March 31, 1992, and shall amend and file with the FDIC amended Reports of Condition and Income which accurately refleet the financial condition of the Bank as of the date of each such Report.
   (b) In addition to the above and during the life of this ORDER, the Bank shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the reporting period. In particular such Reports shall include any adjustment in the Bank's books made necessary or appropriate as a consequence of any FDIC or Department examination of the Bank during that reporting period.

   [.16] 16. The Bank shall not declare or pay dividends in any amount except as follows:

   (a) That such declarations and payare made in accordance with appliState and Federal laws and regulations;
   (b) That after payment, of such dividends, the ratio of adjusted Tier 1 capital {{4-30-93 p.C-3034}}to adjusted Part 325 total assets of the Bank will be not less than 6.5 percent;
   (c) That such declaration and payment of dividends shall be approved in advance by the board of directors of the Bank; and
   (d) That such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director.

   [.18] 18. The Bank's board of directors shall appoint a committee composed of at least three directors who are not now and have never been involved in the daily operations of the Bank, and whose composition is acceptable to the Regional Director (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.
   19. 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 detailing the form, content, and manner of any actions taken to secure compliance with this ORDER, and the results thereof.
   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 17, 1993.
   Pursuant to delegated authority.