{{2-28-01 p.C-5026}}
[¶11,745] In the Matter of The Findlay Savings Bank, Cincinnati, Ohio Docket No. 00-103c&b (12-6-00).
A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 12-26-01; see ¶16,298.)
[.1] Management—Qualifications Specified
[.2] Board of Directors—Outside Directors Added to Board
[.3] Capital—Increase Required
{{2-28-01 p.C-5027}}
[.4] Bank Operations—Transactions—Policy Specified
[.5] Bank Operations—Backup and Offsite Storage Procedures Required
[.6] Disaster Recovery Plan—Required
[.7] Information System Activities—Written Assessment Required
[.8] Audit—Program Required
[.9] Reconciliation of Books and Records—Required
[.10] Reconciliation of Books and Records—Examination Required
[.11] Interest Rate Risk Policy—Minimum Requirements
[.12] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required
[.13] Reports of Condition and Income—Amendment Required
[.14] Violations of Law—Correction of Violations Required
[.15] Loan Policy—Preparation or Revision of Policy Required
[.16] Profit Plan—Preparation of Plan Required
[.17] Board of Directors—Committee to Review Compliance with Cease and Desist Order Required
In the Matter of:
THE FINDLAY SAVINGS BANK
CINCINNATI, OHIO
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-00-103c&b
The Federal Deposit Insurance Corporation ("FDIC"), on September 14, 2000, issued to The Findlay Savings Bank, Cincinnati, Ohio ("Bank"), a NOTICE OF CHARGES AND OF HEARING ("NOTICE") pursuant to section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b). The NOTICE charged the Bank with having engaged in unsafe or unsound banking practices. The Bank has also been advised of its right to a NOTICE OF CHARGES AND OF HEARING pursuant to Section 1163.03 of the Ohio Revised Code, detailing the unsafe or unsound banking practices alleged to have been committed by the Bank, and of its right to a hearing on the charges. Having waived those rights, the Bank and representatives for the FDIC and the Division of Financial Institutions for the State of Ohio, Columbus, Ohio ("ODFI") thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated November 28, 2000, whereby, solely for the purpose of this proceeding and without admitting or denying the allegations in the NOTICE, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC and the ODFI.
The FDIC and the ODFI considered the matter and determined that they had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws or regulations. The FDIC and the ODFI, therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED, that the Bank, its institution-affiliated
parties, as that term is defined in section 3(u) of the Act, 12 U.S.C.
§1813(u), and its successors and assigns, cease and desist from the
following unsafe or unsound banking practices and violations of law or
regulation:
A. Operating with inadequate internal routines and controls;
B. Failing to accurately maintain books and records;
C. Failing to implement adequate information systems ("IS")
controls;
D. Operating with inadequate financial and IS audit programs;
E. Operating without an adequate disaster recovery plan;
F. Operating without adequate procedures for information backup;
{{2-28-01 p.C-5028}}
G. Operating with an inadequate allowance for loan and lease losses
("ALLL") for the volume, kind, and quality of loans and leases
held;
H. Operating with lending policies and practices which fail to address
subprime lending, as that term is used in the Interagency Guidelines on
Subprime Lending;
I. Operating with inadequate earnings to maintain acceptable levels of
capital;
J. Violating laws and regulations;
K. Operating with inadequate liquidity in light of the Bank's asset
and liability mix;
L. Failing to adequately monitor and control interest rate risk;
M. Operating with management whose policies and practices are
detrimental to the Bank and which jeopardize the safety of its
deposits; and
N. Operating with a board of directors which has failed to provide
adequate supervision over and direction to the management.
IT IS FURTHER ORDERED, that the Bank, its institution-affiliated
parties, and its successors and assigns, take affirmative action as
follows:
[.1] .1 (a) During the life of this ORDER, the Bank shall have and retain
qualified management. Within 10 days of the effective date of this
ORDER, the Bank shall submit Notifications of Addition of a Senior
Executive Officer under section 32 of the Act, 12 U.S.C. §1813i for
a new chief executive officer and a new chief financial officer
acceptable to the FDIC and to the ODFI. The executive officers shall
assume duties immediately upon receipt of section 32 approval.
(b) Each member of management shall have the qualifications and
experience commensurate with his or her duties and responsibilities at
the Bank. The qualifications of Bank management shall be assessed on
its ability to: (i) cause the Bank to comply with the requirements of
this ORDER; (ii) cause the Bank's electronic or automated information
systems to maintain complete and accurate books and records for the
Bank and its wholly-owned subsidiary FSB Funding, Inc.
("Subsidiary"); (iii) provide oversight of the data processing
activities of the Bank and the Subsidiary; (iv) retain staff
experienced in the types of computer systems used by the Bank and the
Subsidiary; and (v) operate the Bank and the Subsidiary in a safe and
sound manner.
[.2] 2. Within 90 days from the effective date of this ORDER, the Bank shall
submit Notifications of Addition of a Director under section 32 of the
Act, 12 U.S.C. §1813i for two new independent directors acceptable
to the FDIC and to the ODFI. Thereafter, the Bank shall maintain a
board of directors that includes at least two independent directors.
For purposes of this ORDER, a person who is independent shall be any
individual: (a) who is not an officer of the Bank, any subsidiary of
the Bank, any of its affiliated organizations, or any company or bank
controlled by any director of the Bank; (b) who does not own more than
5 percent of the outstanding shares of the Bank; (c) who is not related
by blood or marriage to an officer or director of the Bank or to any
shareholder owning more than 5 percent of the Bank's outstanding
shares, and who does not otherwise share a common substantial financial
interest with such officer, director or shareholder; and (d) who is not
indebted to the Bank in an amount exceeding 5 percent of the Bank's
total Tier 1 capital and ALLL, directly or indirectly. For purposes of
this paragraph, indirect indebtedness includes the debt of any person
related by blood or marriage, or of any entity in which the individual
has a substantial financial interest. After compliance with section 32
of the Act and Part 303, Subpart F of the FDIC Rules and Regulations,
12 C.F.R. Part 303, Subpart F, the addition of any new Bank directors
required by this paragraph may be accomplished, to the extent
permissible by state statute or the Bank's by-laws, by means of
appointment or by election at a regular or special meeting of the
Bank's shareholders.
[.3] .3 (a) Within 30 days from the last day of each calendar quarter
following the effective date of this ORDER, the Bank shall determine
from its Report of Condition and Income its level of Tier 1 leverage
capital as a percentage of its average total assets ("capital
ratio") for that calendar quarter. If the capital ratio is less than
8.0 percent, the Bank shall, within 60 days of the date of the required
determination, increase its capital ratio to not less than 8.0 percent
calculated as of the end of that preceding quarterly period. For
purposes of this ORDER, Tier 1 leverage capital and average total
assets shall be calculated in accordance with Part 325 of
{{2-28-01 p.C-5029}}
the FDIC Rules and Regulations ("Part 325"), 12 C.F.R. Part 325.
(b) Any such increase in Tier 1 capital may be accomplished by the
following:
(i) The sale of common stock and noncumulative perpetual
preferred stock constituting Tier 1 capital under Part 325;
(ii) The elimination of all or part of the assets classified
"Loss" as of July 10, 2000, without loss or liability to the
Bank, provided any such collection on a partially charged-off asset
shall first be applied to that portion of the asset which was not
charged off pursuant to this ORDER;
(iii) The collection in cash of assets previously charged off; or
(iv) The direct contribution of cash by the directors and/or the
shareholders of the Bank; or
(v) Any other means acceptable to the Regional Director for the FDIC's
Chicago Regional Office ("Regional Director"), and the
Superintendent of the ODFI ("Superintendent"); or
(vi) Any combination of the above means.
(c) If all or part of the increase in capital required by this
paragraph is to be accomplished by the sale of new securities, the
board of directors of the Bank shall adopt and implement a plan for the
sale of such additional securities, including the voting of any shares
owned or proxies held by or controlled by them in favor of said plan.
Should the implementation of the plan involve public distribution of
the Bank securities the Bank shall prepare detailed offering materials
fully describing the securities being offered, including an accurate
description of the financial condition of the Bank and the
circumstances giving rise to the offering, and any other material
disclosures necessary to comply with the Federal 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
materials used in the sale of the securities shall be submitted to the
FDIC Registration and Disclosure Section, 550 17th Street, N.W.,
Washington, D.C. 20429, and to the Ohio Division of Financial
Institutions, 77 High Street, 21st Floor, Columbus, Ohio 43266-0121,
for its review. Any changes requested to be made in the materials by
the FDIC or the ODFI shall be made prior to their dissemination.
(d) In complying with the provisions of paragraph 3(c) of this ORDER,
until the offering is completed, 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 in such offering. The
written notice required by this paragraph shall be furnished within 10
calendar days of the date any material development or change was
planned or occurred, whichever is earlier, and shall be furnished to
every purchaser and/or subscriber of the Bank's original offering
materials.
(e) The capital ratio analysis required by this paragraph shall not
negate the responsibility of the Bank and its board of directors for
maintaining throughout the year an adequate level of capital protection
for the kind, quality and degree of market depreciation of assets held
by the Bank.
[.4] .4 Effective immediately, the Bank shall eliminate the practice of
un-posting and re-posting transactions.
[.5] .5 The Bank shall immediately establish and implement adequate backup
and offsite storage procedures for data on in-house information
systems.
[.6] .6 (a) Within 10 days from the effective date of this ORDER, the Bank
shall develop and implement a disaster recovery plan that addresses all
critical services and operations which are provided by internal and
external sources. The plan shall be submitted to the Regional Director
and the Superintendent for review and comment. At a minimum, the
plan shall address:
(i) recovery priorities and procedures;
(ii) determination of when to use alternate sites;
(iii) notification to employees;
(iv) procedures for performing backup and offsite storage;
(v) obtaining backup equipment, software, and current master file
backup; and
(vi) all of the deficiencies regarding the Bank's current plan as
discussed in the FDIC's IS Report of Examination as of July 10, 2000
("IS Report").
(b) Within 60 days of the Bank's receipt
{{2-28-01 p.C-5030}}
of any comments from the Regional Director and the Superintendent, and annually thereafter, the
Bank shall test the disaster recovery plan and report the results of
the test to the board of directors or designated committee. The test of
the plan should include:
(i) testing of all critical business units and functions;
(ii) the use of realistic activity volumes;
(iii) the use of actual backup system and data files from offsite
storage;
(iv) participation and review by internal audit staff; and
(v) a corrective plan of action for all problems encountered.
(c) The Bank's board of directors will review, update, and
approve the disaster recovery plan annually.
[.7] .7 (a) Within 45 days of the effective date of this ORDER, the Bank
shall prepare a written assessment of information systems activities of
the Bank and the Subsidiary. This assessment shall address the findings
of the IS Report with respect to information systems and shall include
the Bank's proposed corrective measures.
(b) Within 10 days of the completion of the assessment described above,
the Bank's board of directors shall review, approve, and submit its
written assessment to the Regional Director and the Superintendent for
review and comment.
(c) Within 30 days of receipt of the Regional Director's and the
Superintendent's comments on the written assessment, the Bank will
adopt and implement all corrective measures detailed in the assessment.
[.8] .8 (a) Within 60 days from the effective date of this ORDER, the
Bank's board of directors shall formulate and submit to the Regional
Director and the Superintendent for review and comment a comprehensive
written audit program, which provides for an effective system of
internal and external audits.
(b) The audit program described in Paragraph 8(a) shall include a
written IS audit program, which shall address:
(i) Whether IS auditing will be performed internally by the Bank
or by an auditing firm whose ownership shall be "independent," as
that term is defined in Paragraph 2, and which is competent to perform
such an audit;
(ii) The frequency and scope of IS auditing;
(iii) Designation of qualified personnel to perform the audit; and
(iv) Requiring the reporting of findings to the Bank's board of
directors or a committee designated by the Bank's board of directors.
(c) Within 10 days of receipt of the Regional Director's and the
Superintendent's comments, the Bank shall implement the audit program.
The internal auditor shall make written monthly reports of audit
findings directly to the Bank's board of directors. The minutes of the
meetings of the board of directors shall reflect consideration of these
reports and describe any action taken as a result thereof.
[.9] 9. Within 10 days of the effective date of this ORDER, the Bank shall
have reconciled its books and records as of September 30, 2000, and
those of the Subsidiary, and shall continue to maintain accurate books
and records. Written documentation of the correction or reconciliation
shall be retained for future regulatory review.
[.10] 10. (a) Within 10 days from the effective date of this ORDER, the Bank
shall retain a certified public accounting firm whose ownership shall
be "independent," as that term is defined in paragraph 2 of this
ORDER, and which is acceptable to the Regional Director and the
Superintendent, to conduct an agreed-upon procedures examination
("examination"), including, but not limited to, reconciliation of
the financial statements of the Bank and the Subsidiary, as of
September 30, 2000.
(b) At a minimum, the examination shall determine:
(i) Whether the Bank and the Subsidiary have reconciled all
accounts and the date of the most recent reconciliation of each
account;
(ii) For all accounts of the Bank and the Subsidiary:
(1) Whether reconciliations are done in a timely manner based on
the risk and volume of activity in each account;
(2) Whether reconciliations adequately report the dollar amount and
the description of any outstanding unreconciled transactions; and
(3) The adequacy of the segregation of duties of the personnel
preparing the reconciliations; and
{{2-28-01 p.C-5031}}
(4) The collectibility of any unreconciled debits outstanding in excess
of 90 days, as of September 30, 2000.
(iii) Whether the Bank and the Subsidiary have adequate written
reconciliation procedures for each account.
(c) The Bank shall require, as part of its agreement with the
accounting firm retained to perform the examination, that the
accounting firm complete the examination within 30 days from the
effective date of the ORDER. The accounting firm's initial written
report, whether in draft or final form, shall be submitted directly to
the Regional Director and the Superintendent at the same time the
report is submitted to the Bank.
(d) Within 10 days of the Bank's receipt of the examination, the Bank
shall carry out all recommendations from this examination.
(e) Within 10 days of the effective date of this ORDER, and every 30
days thereafter, all outstanding debits that are unresolved for more
than 90 days shall be charged off from the books of the Bank and the
Subsidiary.
[.11] 11. (a) Within 60 days from the effective date of this ORDER, the Bank
shall adopt and implement policies and procedures for managing the
Bank's sensitivity to interest rate risk. The Bank's policy shall
comply with the Joint Agency Statement of Policy on Interest Rate Risk
dated June 26, 1996, and the Joint Supervisory Statement on Investment
Securities and End-user Derivative Activities dated April 23, 1998. The
Bank shall submit the policy to the Regional Director and the
Superintendent for their review and comment.
(b) Within 30 days from the Bank's receipt of any comments from the
Regional Director and the Superintendent, the Bank shall revise its
policies to be consistent with the Bank's interest rate risk
measurement methodology.
[.12] 12. (a) Within 60 days from the effective date of this ORDER, the bank
shall formulate and submit to the Regional Director and the
Superintendent for review and comment a written policy addressing
liquidity and asset/liability management. Annually thereafter during
the life of this ORDER, the Bank shall review this policy for adequacy
and, based upon such review, shall make appropriate revisions in the
policy that are necessary to strengthen funds management procedures and
maintain adequate provisions to meet the Bank's liquidity needs. A
copy of the revised policy shall also be submitted to the Regional
Director and the Superintendent upon its completion. The initial policy
shall include, at a minimum, provisions:
(i) Establishing a desirable range for its net non-core funding
ratio;
(ii) Requiring that monthly calculations of the net non-core funding
ratio be provided to the board of directors for review, with such
review noted in the board minutes;
(iii) Identifying the source and use of borrowed and/or volatile funds;
(iv) Establishing a contingency plan to address liquidity deficiencies;
and
(v) Establishing parameters for borrowing funds such as limits
concerning dollar amounts and duration.
(b) Within 30 days from the receipt of all such comments from the
Regional Director or the Superintendent, and after consideration of all
such comments, the Bank shall approve the policy, which approval shall
be recorded in the minutes of a board of directors' meeting.
Thereafter, the Bank shall implement and follow the policy.
[.13] 13. (a) Within 10 days from the effective date of this ORDER, after
review and consideration by the board of directors, the Bank shall make
any required additional provision for loan and lease losses which
reflects the potential for losses in the remaining loans or leases
classified "Substandard" and all other assets in its portfolio
and that of its Subsidiary. At a minimum, the Bank shall adjust the
ALLL in accordance with the recommendation in the Joint FDIC/ODFI
Report of Examination of the Bank as of July 10, 2000 ("Joint
Report").
(b) Within 30 days from the effective date of this ORDER, Reports of
Condition and Income required by the FDIC and filed by the Bank
subsequent to July 10, 2000, shall be amended and refiled if they do
not reflect a provision for loan and lease losses and an ALLL which are
adequate considering the condition of the Bank's loan portfolio, and
which, at a minimum, incorporate the adjustments required by the above
subparagraphs of this ORDER.
(c) Prior to submission or publication of all Reports of Condition and
Income required by the FDIC after the effective date
{{2-28-01 p.C-5032}}
of this ORDER, the
board of directors of the Bank shall review the adequacy of the Bank's
ALLL and accurately report the same. The minutes of the board meeting
at which such review is undertaken shall indicate the findings of the
review, the amount of increase in the reserve recommended, if any, and
the basis for determination of the amount of reserve provided.
[.14] 14. (a) Within 30 days from the effective date of this ORDER, the Bank
shall eliminate and/or correct all violations of law and/or regulations
listed in the Joint Report including, but not limited to, correction of
the violation of Section 1161.58(D)(2) of the Ohio Revised Code,
regarding the loans to the Subsidiary.
(b) Within 30 days from the effective date of this ORDER, the Bank
shall implement procedures to ensure future compliance with all
applicable laws and regulations.
[.15] 15. (a) Within 30 days from the effective date of this ORDER, and
annually thereafter, the board of directors of the Bank shall review
the Bank's loan policy and procedures for adequacy and, based upon
this review, shall make all appropriate revisions to the policy
necessary to strengthen lending procedures and abate additional loan
deterioration. The revised written loan policy and any subsequent
modifications shall be submitted to the Regional Director and the
Superintendent for review and comment upon their completion.
(b) The initial revisions to the bank's loan policy required by this
paragraph, at a minimum, shall include provisions which will bring the
policy into conformance with the standards set forth in the Interagency
Guidance on Subprime Lending.
[.16] 16. (a) Within 90 days from the effective date of this ORDER, the Bank
shall formulate and submit to the Regional Director and the
Superintendent for review and comment a written profit plan and a
realistic, comprehensive budget for all categories of income and
expense for calendar year 2001. Thereafter, the Bank shall revise the
budget at least 30 days prior to the end of every calendar quarter to
address the following four calendar quarters. The plan required by this
paragraph shall contain formal goals and strategies, consistent with
sound banking practices, to reduce discretionary expenses and to
improve the Bank's overall earnings, and shall contain a description
of the operating assumptions that form the basis for major projected
income and expense components.
(b) The written profit plan shall address, at a minimum salaries paid
to employees of the Bank and its Subsidiary, and occupancy expenses.
(c) Within 30 days following the end of each calendar quarter, the
Bank's board of directors shall evaluate the Bank's actual
performance in relation to the plan and budget required by this
paragraph and record the results of the evaluation, and any actions
taken by the Bank, in the minutes of the board of directors' meeting
at which such evaluation is undertaken.
(d) The written profit plan and budget required by this ORDER shall be
prepared and submitted to the Regional Director and the Superintendent
for review and comment 30 days prior to the end of each calendar year
for which this ORDER is in effect. Within 30 days of receipt and
consideration of all such comments from the Regional Director and the
Superintendent, the Bank shall approve the plan, which approval shall
be recorded in the minutes of a board of directors' meeting.
Thereafter, the Bank shall implement and follow the plan.
[.17] 17. (a) Within 30 days from the effective date of this ORDER, the
Bank's board of directors shall develop, adopt, and implement a
program that will provide for monitoring of the Bank's compliance with
this ORDER.
(b) Following the required date of compliance with subparagraph (a)
above, the Bank's board of directors shall review the Bank's
compliance with this ORDER and record its review in the minutes of each
regularly scheduled monthly board of directors' meeting.
18. Within 30 days following the end of every calendar quarter
following the effective date of this ORDER, the Bank shall furnish to
the Regional Director and the Superintendent written progress reports,
signed by each member of the Bank's board of directors, detailing the
form and manner of any actions taken to secure compliance with this
ORDER. Such reports may be discontinued when the corrections required
by this ORDER have been accomplished and the Regional Director and the
Superintendent have, in writing, released the Bank from making further
reports.
The effective date of this ORDER shall be
{{5-31-03 p.C-5033}}
a 10 days after its issuance by the FDIC and the ODFI.
The provisions of this ORDER shall be binding upon the Bank, its
institution-affiliated parties, and any successors and assigns thereof.
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 and the ODFI.
Pursuant to delegated authority.
Dated: December 6th, 2000.
