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Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders |
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FDIC Enforcement Decisions and Orders
{{06-30-05 p.12389.1}} A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent was engaged in unsafe and unsound practices. [.1] Bank Secrecy Act—Compliance Program [.2] Management—Qualifications Specified [.3] Board of Directors—Membership Succession Plan Required [.4] Loan Loss Reserve— Establishment of or Increase in Required [.5] Capital—Tier 1 Capital Increase/Maintain [.6] Strategic Plan—Preparation of
Required
[.7] Assets—Growth Restricted [.8] Loan Policy—Preparation or Revision of Policy Required [.9] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credit [.10] Cease and Desist Orders— Banking Practices Unsafe and Unsound— Overdue Loans, Accrual of Interest [.11] Assets—Adversely Classified Assets—Reduction Required [.12] Consumer Credit Transactions—Review Required [.13] Profit Plan—Preparation of Plan Required [.14] Funds Management and Liquidity—Preparation or Revision of Funds [.15] Risk Management—Plan Required [.16] Bank Operations—Internal Review and Control Procedures—Establish [.17] Bank Branches—Establishment of, FDIC Consent Required [.18] Information Technology Plan—Implementation of Required [.19] Dividends—Dividends Restricted [.20] Technical Exceptions— Correction of Technical Exceptions Required [.21] Violations of Law— Corrections of Violations Required [.22] Shareholders—Disclosure of Cease and Desist Order Required [.23] Progress Report—Written Report Required In the Matter of
Pepperell Bank & Trust, Biddeford, Maine ("Bank") having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices alleged to have been committed by the Bank and of its right to a hearing on such alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b)(1), 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 March 31, 2005, whereby solely for the purpose of this proceeding and without admitting or denying any unsafe or unsound banking practices, 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 violations of law and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and 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 Act, 12 U.S.C. §1813(u), and its successors and assignees, cease and desist from the following unsafe or unsound banking practices and violations of law and/or regulations: (a) engaging in violations of applicable laws and regulations, including, but not limited to, violations of the Bank Secrecy Act and related regulations; (b) operating with inadequate supervision by the Board of Directors; (c) operating with management policies and practices that are detrimental to the Bank; (d) operating with inadequate capital, given the Bank's risk profile; (e) operating with an excessive volume of adversely classified assets; (f) operating with inadequate lending practices, including, but not limited to, poor {{06-30-05 p.12389.3}} loan documentation and credit administration weaknesses; (g) operating with inadequate earnings; (h) operating with marginal liquidity; (i) operating with inadequate policies and practices with respect to the Bank's allowance of loan and lease losses; and (j) operating with information technology deficiencies. IT IS FURTHER ORDERED that the Bank, its institution-affiliated parties, and its successors and assignees, take affirmative action as follows: [.1] 1. Within ninety (90) days from the effective date of this Order, the Board of Directors shall increase its supervision and oversight of the Bank's Bank Secrecy Act ("BSA") compliance program. At a minimum, the Board of Directors shall: (a) Ensure that the Bank corrects the violations of section 326.8 of the Rules, 12 C.F.R. §326.8, noted in the 2004 Examination report; (b) Ensure that the Bank complies with the regulations pertaining to currency transaction reports and suspicious activity reports; (c) Review and revise the roles and responsibilities of the Bank's BSA Officer and ensure that the Bank has a more effective and centralized approach to BSA management; (d) Actively supervise and monitor the Bank's BSA program and its BSA Officer, carefully considering all reports submitted to the Board of Directors from such officer and making timely and effective responses; (e) Carefully review and consider the results of the Bank's internal and external audits and take effective and timely actions to correct or cause the correction of any shortcomings in the Bank's BSA program that are brought to light by such audits; (f) Foster a positive compliance culture, so that Bank employees will understand that BSA compliance is a priority; (g) Consider staffing levels and revisions to job descriptions, if necessary, to ensure that Bank personnel responsible for any aspects of the BSA program have sufficient time to fulfill their responsibilities; (h) Establish ongoing training in BSA laws and regulations for all appropriate personnel, both operations and lending staff, and develop and implement a system to test employees on their knowledge of BSA related laws and regulations. The Bank shall monitor training effectiveness and document training activities. The training program should be updated periodically at reasonable intervals, to ensure that appropriate personnel are provided with the most current and up-to-date information; (i) Create and implement an effective internal review and monitoring system, for the purpose of ensuring that the Bank is operating in compliance with all BSA-related laws and regulations. Such system should be designed, at a minimum, to detect and identify any weaknesses that may exist in the Bank's compliance efforts prior to audits and/or examinations and to provide for periodic reviews of document filing and retention procedures, and (j) Ensure that the Bank implements an effective program for record retention. [.2] 2. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall have and retain qualified management. 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 applicable laws and regulations, and (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness and liquidity. During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's New York Regional Office ("Regional Director") and the State of Maine's Superintendent of Financial Institutions ("Superintendent") in writing of any changes in management. The notification must include the names and background of any replacement personnel and must be provided before any such individual assumes the new position and exercises authority. (b) Within sixty (60) days from the effective date of this ORDER,
the Board of Directors shall develop a written analysis and assessment
of the Bank's management and
staffing needs ("Management Plan"), which shall include, at a minimum: (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank; (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management; (iii) evaluation of each senior Bank officer (as defined by the Board of Directors, subject to the concurrence of the Regional Director and Superintendent) ("Officer Assessment") to determine whether each individual possesses the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, and whom the Board of Directors determines are necessary to fill Bank officer or staff member positions consistent with the Board's analysis, evaluation and assessment as provided in paragraphs 2(b)(i) and 2(b)(iii) of this ORDER. (c) The Officer Assessment shall be prepared by an independent consultant with experience and expertise in evaluating the management and operation of financial institutions like the Bank, and counseling managers of financial institutions regarding management and operation practices. (d) The Management Plan shall be submitted to the Regional Director and the Superintendent for review and comment within thirty (30) days from the effective date of this ORDER. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the Management Plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications of the Management Plan may be made only after giving the Regional Director and the Superintendent written notice of the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and the Superintendent within thirty (30) days from their receipt of the notice of proposed modification. No such modification shall become effective until approved by the Board of Directors, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers and employees shall implement and follow the Management Plan and any subsequent modification thereto. (e) The Management Plan shall also include the requirement that the Board of Directors of the Bank provide supervision over lending, investment and operating policies of the Bank sufficient to ensure that the Bank complies with the provisions of this ORDER. (f) The Bank's Board of Directors shall supervise and monitor the Bank's compliance with this ORDER. [.3] 3. (a) Within ninety (90) days from the effective date of this Order, the Board of Directors, in conjunction with the Board of Directors of Pepperell Bancshares Financial Group, Inc. ("PBFG"), shall develop a plan for membership succession. At a minimum, the plan of succession shall: (i) provide a minimum number of directors of the Bank, considering the age and experience of the current members of the Board. (ii) establish minimum qualifications for directors of the Bank; (iii) establish the length and staggering of terms for directors of the Bank; (iv) provide a minimum number of directors of the Bank who are not related to the majority shareholders of PBFG; and (v) contain a specific timetable for the implementation of the plan of succession. The plan of succession shall be developed within ninety (90) days of the effective date of this Order. The plan shall be subject to consideration of comment from and prior written approval of the Regional Director and the Superintendent. Within thirty (30) days following the receipt of approval from the Regional Director and the Superintendent, the Board of Directors shall approve the plan of succession, and such approval shall be recorded in the minutes of the Board. The Bank, its directors, officers and employees shall implement and follow the plan of succession, and PBFG, its directors, officers, and employees shall facilitate the implementation of the plan of succession. (b) The Bank shall establish a standard Board of Directors package
to guide the directors
during their monthly meetings. Such package shall include, at a minimum, meaningful ratios and other relevant statistics documenting the financial trends and condition of the Bank. (c) Within ninety (90) days from the effective date of this Order, the Board of Directors shall develop an education plan for the Board. The plan shall specifically identify the types of training to be provided, shall include training relating on Directors' fiduciary responsibilities and the information necessary to perform those responsibilities, and shall approximate dates of the training to be provided to all Directors. When completed, the education plan shall be submitted to the Regional Director and the Superintendent for review and comment. [.4] 4. Within ninety (90) days from the effective date of this Order, the Bank shall review its Allowance for Loan and Lease Losses ("ALLL") Policy for appropriateness and completeness. At a minimum, the ALLL Policy shall address the following factors: the results of internal loan review, loan loss experience, trends of delinquent and non-accrual loans, an estimate of potential loss exposure on significant credits, concentrations of credit, present and prospective economic conditions, frequency of review, and compliance with the prevailing requirements of the Instructions for Reports of Condition and Income ("Instructions"). The ALLL Policy, along with any necessary amendments, shall be submitted to the Regional Director and the Superintendent for review and comment within ninety (90) days from the effective date of this Order. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the ALLL Policy, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board. [.5] 5. Within ninety (90) days from the effective date of this Order, the Bank shall formulate and submit for the Regional Director's and the Superintendent's prior written approval a realistic and comprehensive written capital plan ("Capital Plan") that specifically identifies the strategies and actions that will be taken to improve the Bank's capital position. The Capital Plan shall provide for the maintenance of a Tier 1 leverage capital ratio of not less than 7.00% from the effective date of this Order until September 30, 2005, and 7.25% thereafter until the date of the termination of this Order. Within thirty (30) days following the receipt of approval from the Regional Director and the Superintendent, the Board of Directors shall approve the Capital Plan, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the Capital Plan may be made only after giving the Regional Director and Superintendent written notice of the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and the Superintendent within thirty (30) days from their receipt of the notice of proposed modification. No such modification shall be effective until approved by the Board of Directors, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers, and employees shall follow the Capital Plan and any subsequent modifications thereof. [.6] 6. Within ninety (90) days of the effective date of this Order, the
Bank shall formulate and submit to the Regional Director and the
Superintendent for review and comment a realistic and comprehensive
written strategic plan ("Strategic Plan") that corresponds to the
written profit plan referenced in paragraph 13 of this ORDER. The
Strategic Plan required by this paragraph shall include, but not be
limited to, an assessment of the Bank's current financial condition
and market area, and a description of the operating assumptions that
form the basis for major projected income and expense components.
Within thirty (30) days following receipt from the Regional Director
and Superintendent of any comment, and after consideration of such
comment, the Board of Directors shall approve the Strategic Plan, and
such approval shall be recorded in the minutes of the Board of
Directors. Subsequent modifications to the Strategic Plan may be made
only after giving the Regional Director and Superintendent written
notice of the proposed modification, and after consideration of any
responsive comments submitted by the Regional Director and the
Superintendent within thirty (30) days from their receipt of the notice
of proposed modification. No such modification shall be effective until
approved by the Board of Directors, and such approval shall be recorded
in the
minutes of the Board of Directors. The Bank, its directors, officers, and employees shall follow the Strategic Plan and any subsequent modifications thereto. [.7] 7. Beginning with the effective date of this Order, the Bank shall not increase its total assets by more than 15% in a calendar year without the Regional Director's and Superintendent's prior written approval. [.8] 8. (a) Within sixty (60) days from the effective date of this ORDER, the Board of Directors shall develop a written plan ("Loan Risk Plan") to lessen the Bank's risk position with respect to each borrower who or which had outstanding principal debt owing to the Bank in excess of $100,000 and classified "Substandard" or "Doubtful," in whole or in part, in the 2004 Examination report. The Bank shall add to its Loan Risk Plan loans in excess of $100,000 which are so classified in any subsequent examination. In developing such plan, the Bank shall, at a minimum: (i) in the case of loans, review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position. Based upon such review and evaluation, the Loan Risk Plan shall: (i) establish target dollar levels to which the Bank shall reduce the aggregate dollar volume of "Substandard" or "Doubtful" classifications as of the 2004 Examination, as well as any additional assets that are in need of criticism according to internal Bank review; and (ii) provide for the submission of written monthly progress reports to the Bank's Board of Directors for review and notation in the minutes of the Board of Directors. Exhibit A provides the form for the progress report. As used in this paragraph 8, "reduce" means to (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC and the Bureau of Financial Institutions. Payment of loans with the proceeds of the loans made by the Bank, other than loans to qualified third party borrowers, does not constitute "reduction", "collection", "charge-off", or "improvement" for purposes of this paragraph. (b) The Loan Risk Plan described by paragraph 8(a) of this Order shall be submitted to the Regional Director and the Superintendent for review and comment within sixty (60) days from the effective date of this ORDER. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the Loan Risk Plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the Loan Risk Plan may be made only after giving the Regional Director and the Superintendent written notice of the proposed modifications, and after consideration of any responsive comments submitted by the Regional Director and the Superintendent within thirty (30) days from their receipt of the notice of proposed modifications. No such modification shall become effective until approved by the Board of Directors, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers and employees shall follow the Loan Risk Plan and any subsequent modification thereto. [.9] 9. The Bank shall not extend or renew, directly or indirectly, credit to, or for the benefit of, any borrower who or which has a loan or other extension of credit with the Bank that had been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected, unless a majority of the Bank's Board of Directors: (a) determines that such extension or renewal is in the best interest of the Bank; (b) determines that the Bank has satisfied the requirements set out in paragraph 8 of this ORDER as to such borrower; and (c) approves such extension or renewal. A written record of the Board of Directors' determination and approval of any extension or renewal under the terms of this paragraph 9 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the Board of Directors. [.10] 10. The Bank shall not accrue interest on any loan that is, or becomes,
ninety (90) days or more delinquent as to principal or interest, unless
the loan is both well secured and in the process of collection. For
purposes of this paragraph 10, "well secured" and "in the
process of collection" shall have the same meaning as those terms
have in the prevailing Instructions. The Bank shall reverse on its books all previously accrued but uncollected interest on any loan that has ceased to accrue interest pursuant to this provision. [.11] 11. Within ninety (90) days of the effective date of this ORDER, the Bank shall significantly reduce the dollar volume of assets subject to Special Mention as listed in the 2004 Examination report, or otherwise sufficiently improve such assets so as to warrant removal from the Special Mention Category. [.12] 12. Within sixty (60) days from the effective date of this ORDER, the Bank shall complete the revisions to its consumer lending policy. The revised written consumer loan policy shall be submitted to the Regional Director and the Superintendent for review and comment within such 60 day period. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the revised written consumer loan policy, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the revised written consumer loan policy may be made only after giving the Regional Director and the Superintendent written notice of the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and the Superintendent within thirty (30) days from their receipt of the notice of proposed modification. No such modification shall become effective until approved by the Board of Directors. and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers, and employees shall follow the Loan Policy and any subsequent modification thereto. [.13] 13. (a) Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall develop a written profit plan ("Profit Plan") consisting of goals and strategies for improving the earnings of the Bank. The Profit Plan shall include, at a minimum: (i) identification of the major areas in, and means by, which the Board of Directors will seek to improve the Bank's operating performance; (ii) realistic and comprehensive budgets; (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components. (b) The Profit Plan shall be submitted to the Regional Director and the Superintendent for review and comment within one hundred twenty (120) days from the effective date of this ORDER. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the Profit Plan plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the Profit Plan may be made only after giving the Regional Director and the Superintendent written notice of the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and the Superintendent within thirty (30) days from their receipt of the notice of proposed modifications. No such modification shall become effective until approved by the Board of Directors, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers, and employees shall follow the Profit Plan and any subsequent modification thereto. [.14] 14. Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall improve its policies and practices with respect to liquidity and funds management, as follows: (i) the calculation and assumptions to derive the Basic Surplus ratio shall be reviewed and adjusted, as appropriate, to address cash, coverage ratios for maturing certificates of deposit, coverage ratios for non-maturity deposits, and the amount of maturing Federal Home Loan Bank advances; (ii) the internally calculated non-core funding dependency ratio shall be modified to include financial institution non-core certificates of deposit; (iii) the Asset Liability Management policy shall be amended to include a standard of risk for non-core funding dependency; and, {{06-30-05 p.12389.8}} (iv) the Bank shall formulate and submit to the Regional Director and the Superintendent for review and comment a plan to reduce liquidity risk ("Liquidity Plan"). The Bank shall include in the Liquidity Plan contingency options for dealing with unexpected liquidity events. The Liquidity Plan shall be submitted to the Regional Director and the Superintendent for review and comment within one hundred twenty (120) days from the effective date of this ORDER. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the Liquidity Plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the Liquidity Plan may be made only after giving the Regional Director and Superintendent written notice of the proposed modifications, and after consideration of any responsive comments submitted by the Regional Director and the Superintendent within thirty (30) days from their receipt of the notice of proposed modifications. No such modifications shall become effective until approved by the Board of Directors. and shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers and employees shall follow the Liquidity Plan and any subsequent modification thereto. [.15] 15. Within ninety (90) days from the effective date of this Order, the Bank shall develop and implement a comprehensive risk management program. [.16] 16. Within sixty (60) days from the effective date of this Order, the Bank shall address the internal routine and control deficiencies noted in the 2004 Examination by providing enhanced training, supervision and oversight. [.17] 17. Beginning with the effective date of this Order, the Bank shall not establish any branches or acquire property for future expansion without the prior written approval of the Regional Director and the Superintendent. [.18] 18. Within ninety (90) days from the effective date of this Order, the Bank shall develop a timetable to correct the deficiencies noted in the Information Technology ("IT") Report of Examination dated August 16, 2004 as follows: (a) The Board of Directors shall adopt a strategic plan for the IT function that complies with the guidance set forth under the topic Strategic IT Planning in the Management Booklet of the FFIEC IT Examination Handbook issued June 2004; (b) The Board of Directors shall require that management adhere to an appropriate project management cost, including either direct financial outlay or investment of personnel resources, or risk to the Bank; and, (c) Bank management shall establish reasonable timetables for periodic penetration and network vulnerability testing and identify qualified independent professionals to perform the assessments. [.19] 19. The Bank shall not pay or declare any dividends that would result in the Bank's Tier 1 leverage capital ratio falling below 7.00% until September 30, 2005, and 7.25% thereafter without the prior written consent of the Regional Director and the Superintendent. [.20] 20. Within ninety (90) days from the effective date of this ORDER, the Bank shall correct the technical exceptions on loans noted on pages 40 through 43 of the 2004 Examination report. [.21] 21. Within ninety (90) days from the effective date of this ORDER, the Bank shall eliminate and/or correct all remediable violations of law and regulations committed by the Bank as described on pages 27 through 29 of the 2004 Examination report. [.22] 22. The Bank shall send to PBFG shareholders a description of this Order, in conjunction with the next PBFG shareholder communication and also in conjunction with its notice or proxy statement preceding the PBFG's next shareholder meeting. Such 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, and to the Superintendent for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC or the Superintendent shall be made prior to dissemination of the description, communication, notice, or statement. [.23] 23. Within thirty (30) days from the effective date of this ORDER, and,
thereafter, within thirty (30) days from the end of
each calendar quarter, the Bank shall furnish written progress reports to the Regional Director and the Superintendent detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof. In addition, the Bank shall furnish such other reports as requested by the Regional Director and the Superintendent. All progress reports and other written responses to this ORDER shall be reviewed by the Board of Directors of the Bank and made a part of the minutes of the Board meeting. This ORDER shall become effective ten (10) days from the date of its issuance. The provisions of this ORDER shall be binding upon the Bank and its institution-affiliated parties, as defined in 12 U.S.C. §1813(u). The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC. Pursuant to delegated authority. Dated at Braintree, Massachusetts this 5th day of April, 2005.
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Last Updated 7/24/2005 | legal@fdic.gov |
