In the Matter of
FIRST SAVINGS BANK NORWOOD, OHIO (Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
First Savings Bank, Norwood, Ohio ("Bank"), having been
advised by the Federal Deposit Insurance Corporation ("FDIC") of
its right to a NOTICE OF CHARGES AND OF HEARING ("NOTICE")
detailing the unsafe or unsound banking practices and violations of
law, rule or regulation alleged to have been committed by the Bank, and
of its right to a hearing on the charges under section 8(b) of the
Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818(b),
and having received from the Division of Financial Institutions for the
State of Ohio ("ODFI") a NOTICE OF CHARGES AND INTENT TO ISSUE A
CEASE AND DESIST ORDER AND NOTICE OF OPPORTUNITY FOR HEARING pursuant
to section 1163.03 of the Ohio Revised Code, and having waived those
rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN
ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with
representatives of the FDIC and ODFI dated March 28, 2003, whereby,
solely for the purpose of this proceeding and without admitting or
denying any of the alleged charges of unsafe or unsound banking
practices and violations of law, rule or regulation, the Bank consented
to the issuance of an ORDER TO CEASE AND DESIST in the form set forth
herein ("ORDER") by the FDIC and ODFI.
The FDIC and ODFI considered the matter and determined that they had
reason to believe that the Bank had engaged in unsafe or unsound
banking practices and violations of law, rule or regulation. The FDIC
and ODFI, therefore, accepted the CONSENT AGREEMENT and the FDIC and
ODFI issued the following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED, that the Bank and its institution-affiliated
parties, as that term is defined in section 3(u) of the FDI 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, rule or regulation:
A. Operating with inadequate internal controls and procedures;
B. Failing to accurately maintain books and records;
C. Failing to implement adequate information systems ("IS")
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;
G. Operating with policies, procedures and internal controls which
result in inadequate earnings;
H. Operating with an inadequate level of capital protection in light of
the Bank's risk profile; and
I. Operating with a board of directors which fails 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
[.1] 1. (a) The Bank shall immediately allocate the necessary resources to
return the Bank's books and records to a complete and accurate state
and to continue to maintain accurate books and records.
(b) By May 15, 2003, the Bank shall reconcile all general ledger
accounts that are presently unreconciled or out of balance. Written
documentation of the correction and reconciliation shall be retained
for future regulatory review. These general ledger accounts include,
but are not limited to the following: correspondent bank accounts; ATM
settlement; loans-in-process; office cash; mortgage servicing rights;
customer exchange; real estate owned; other receivables; all escrow
accounts; and prepaid expenses.
(c) Upon completion of the reconciliation process required in
subsection (b), above, all general ledger debits that have been
outstanding for more than 90 days and are unresolved shall be charged
off from the Bank's books.
(d) Upon completion of the reconciliation process required in
subsection (b), above, and the charge-offs taken in accordance with
subsection (c), above, the Bank shall engage an independent certified
public accountant to perform an agreed upon procedures engagement and
report on the reconciliation of the Bank's general ledger accounts,
the accuracy of the balances reported in the general ledger accounts,
and the proprietary of the charge-offs. The Bank's engagement letter
shall ensure that the engagement shall be completed within 60 days of
the completion of the reconciliation process and charge-offs taken
pursuant to subsections (b) and (c), above.
(e) Within 30 days of the completion of the reconciliation process
required in subsection (b), above, and the charge-offs taken in
accordance with subsection (c), above, the Bank shall refile, as
necessary, any quarterly Reports of Condition and Income ("Call
[.2] 2. (a) Effective immediately and on a daily basis, the Bank shall
properly reconcile all transactions posted on or after the date of this
ORDER in the following types of general ledger accounts: cash and cash
items; due from correspondent banks; deposits, including interest
payable; loans, including interest receivable; official checks; federal
funds purchased and sold; investments; in-process accounts; suspense
accounts; ATM settlement; and capital.
(b) Effective immediately and on at least a monthly basis, the Bank
shall properly reconcile all transactions posted on or after the date
of this ORDER for all general ledger accounts not specifically
identified in subparagraph (a), above.
(c) On a monthly basis, all general ledger debits posted on or after
the date of this ORDER that remain outstanding and unresolved for more
than 90 days shall be charged off from the Bank's books.
[.3] 3. Within 60 days from the effective date of this ORDER, the Bank shall
adopt and implement effective information systems and internal controls
and procedures for the operation of the Bank in such a manner as to
provide for safe and sound banking practices. The information systems
and internal controls and procedures should address, at a minimum, the
(i) An accounting system that is kept current and in accordance
with well-established accounting and banking principles. The accounting
system shall: (A) reflect the Bank's actual financial condition on a
daily basis and the accurate results of operations; and (B) provide for
an audit trail that enables the tracing of any given item as it passes
through the Bank's books.
(ii) The internal controls and procedures shall include: (A) daily
reconcilement of those general ledger accounts identified in paragraph
2(a), above; (B) at least monthly reconcilement of general ledger
accounts not specifically identified in paragraph 2(a), above; (C)
general ledger entries that contain an adequate description of all
transactions; (D) current posting of all accounts and records; (E) a
system that requires the separation of duties or adequate compensating
controls for general ledger posting, signing authorities, and
reconciliations, and (F) an audit program that shall include a review
of management's actions to address material weaknesses in, and the
effectiveness of, the internal control system and information
(iii) Teller and cash control procedures shall include: (A) an adequate
description of all transactions; (B) individual accountability of all
Bank personnel who handle cash or assets; and (C) dual control/joint
custody procedures to provide for the protection of all physical
assets, including but not limited to, cash, the vault, the night
depository, ATMs, keys to teller cash boxes, and all checks.
[.4] 4. (a) Within 120 days from the effective date of this ORDER, a
management report shall be prepared and signed by its chief executive
officer or chief financial officer which contains a statement of
management's responsibilities for establishing and maintaining an
adequate internal control structure and procedures for financial
reporting and an assessment by management of the effectiveness of the
internal control structure and procedures.
(b) Within 150 days from the effective date of this ORDER, an
independent accountant, engaged by the Bank, shall provide a report
concerning the appropriateness of the policies and procedures and
proposed monitoring of the Bank's internal control structure and
procedures for financial reporting.
[.5] 5. Within 45 days from the effective date of this ORDER, the Bank shall
ensure that its general ledger system is fully operational, including,
but not limited to, the recording and processing of all transactions
and the completion of appropriate training.
[.6] 6. Within 45 days from the effective date of this ORDER, the Bank shall
improve the operational stability of the main file server and improve
the reliability of data communication. At a minimum, the Bank shall
take the following steps:
(a) The Bank shall upgrade or replace the main file server to
ensure that there is adequate storage capacity;
(b) The Bank shall redesign the network architecture to ensure that
the current main file server is no longer a single point of failure in
the data communication with the servicer; and
(c) The Bank shall ensure that necessary service packs and patches are
installed on a timely basis.
[.7] 7. Within 60 days from the effective date of this ORDER, the Bank shall
adopt a Contingency Planning and Disaster Recovery Policy, which
requires, at a minimum: disaster recovery procedures in the event of an
emergency; procedures and systems that provide for the daily back up of
all critical systems; procedures and systems that provide for the
periodic back up of non-critical systems; and annual testing of the
disaster recovery procedures.
[.8] 8. (a) During the life of this ORDER, the Bank shall have and retain
qualified management. Each member of management shall have the
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) Ensure that the Bank's books and records are in and remain in a
complete and accurate state;
(iv) Comply with applicable laws, rules, and regulations; and
safe and sound condition,
including asset quality, capital adequacy, earnings, management
effectiveness, and liquidity.
(b) During the life of this ORDER, and 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 ("section 32"), 12
U.S.C. §1831(i), and Subpart F of Part 303 of the FDIC Rules and
Regulations, 12 C.F.R. §§ 303.100303.104. For purposes of this
ORDER, "senior executive officer" is defined as in section 32 and
section 303.101(b) of the FDIC Rules and Regulations, 12 C.F.R.
§303.101(b), and includes any person identified by the FDIC and
ODFI, whether or not hired as an employee, with significant influence
over, or who participates in, major policymaking decisions of the Bank.
In addition, the Bank shall simultaneously submit a copy of any section
32 application to ODFI for approval.
9. Effective as of the date of this ORDER, the Bank shall not,
without the prior written approval of the FDIC and ODFI, enter into any
material transaction other than in the usual course of business,
including any investment, expansion, acquisition, sale of assets, or
other similar action with respect to which the Bank is required to
provide notice to the FDIC or ODFI.
[.9] 10. (a) From the effective date of this ORDER through December 31,
2003, the Bank shall have and maintain its level of Tier I capital as a
percentage of its total assets ("Tier I Capital Ratio") at not
less than 6.25 percent. For purposes of this ORDER, Tier I capital and
total assets shall be calculated in accordance with Part 325 of the
FDIC Rules and Regulations ("Part 325"), 12 C.F.R. Part 325.
(b) By December 31, 2003, the Bank shall increase its level of Tier
I Capital Ratio to not less than 6.5 percent.
(c) By June 30, 2003, the Bank shall have and maintain a Total
Risk-based Capital Ratio ("Total Risk-Based Capital Ratio") of
not less than 10.0 percent. For purposes of this ORDER, the Bank's
Total Risk-Based Capital Ratio means the ratio of qualifying total
capital to risk-weighted assets, as calculated in accordance with the
FDIC's Statement of Policy on Risk-Based Capital (appendix A to
subpart A of Part 325).
(d) Within 30 days from the last day of each calendar quarter beginning
with the calendar quarter ending March 31, 2004, the Bank shall
determine from its Report of Condition and Income its Tier I and Total
Risk-Based Capital Ratios for that calendar quarter. If the Tier I
Capital Ratio is less than 6.5 percent, the Bank shall, within 60 days
of the date of the required documentation, increase its Tier I Capital
Ratio to not less than 6.5 percent calculated as of the end of that
preceding quarterly period. If the Bank's Total Risk-Based Capital
Ratio is less than 10.0 percent, the Bank shall, within 60 days of the
date of the required determination, increase its Total Risk-Based
Capital Ratio to not less than 10.0 percent calculated as of the end of
that preceding quarterly period.
(e) Any such increase in the Tier I capital or total capital ratios may
be accomplished by the following:
(i) The elimination of all or part of the assets classified
"Loss" 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; or
(ii) The collection in cash of assets previously charged off; or
(iii) Reduce its asset size by using liquid assets to reduce deposit
(iv) Reduce assets having risk-weightings above 0%; or
(v) Any other means acceptable to the Regional Director and ODFI; or
(vi) Any combination of the above means.
(f) 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.
[.10]11. Effective immediately, the Bank shall not renew brokered deposits
or obtain new brokered deposits without the prior written approval of
the Regional Director and ODFI. Any request for approval to renew
brokered deposits or obtain new brokered deposits shall be made in
accordance with the waiver provision of section 337.6(c) of the FDIC
Rules and Regulations, 12 C.F.R. §337.6(c). For purposes of this
brokered deposits are defined as described in section 337.6(a)
of the FDIC Rules and Regulations, 12 C.F.R. §337.6(a).
[.11] 12. Within 90 days from the effective date of this ORDER, the Bank
shall update its Profit Plan ("Plan") which was submitted to the
FDIC and ODFI on November 14, 2002. The Plan should be consistent with
the Bank's Loan, Investment, and Funds Management Policies. The Plan,
and any subsequent revisions to the Plan, shall be submitted to the
Regional Director and ODFI upon completion for review and comment. The
Plan shall include the Bank's goals and strategies to improve and
sustain earnings. At a minimum, the Plan shall:
(a) identify the major areas for improving the Bank's operating
performance and capital;
(b) provide descriptions of the assumptions to support projections of
income and expense components;
(c) contain realistic and comprehensive budgets;
(d) include a budget review process to monitor the Bank's income and
expenses and compare the actual results to budget projections; and
(e) require periodic management job and salary reviews in relation to
[.12] 13. During the life of this ORDER, regular Board of Director meetings
shall be held at least bi-weekly.
[.13] 14. During the life of this ORDER and within three days following each
meeting of the Bank's Board of Directors as required in paragraph 13,
above, the Board shall submit a written report to the Regional Director
and ODFI detailing the Bank's compliance with this ORDER.
The effective date of this ORDER shall be 10 calendar days after
its issuance by the FDIC and 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 provision has
been modified, terminated, suspended, or set aside by the FDIC and