UNITED STATES OF AMERICA

DEPARTMENT OF THE TREASURY

COMPTROLLER OF THE CURRENCY

 

In the Matter of:

First National Bank in Howell

Howell, Michigan

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AA-EC-2013-83

 

CONSENT ORDER

 

WHEREAS, the Comptroller of the Currency of the United States of America
(“Comptroller” or “OCC”), through his authorized representative, has supervisory
authority over First National Bank in Howell, Howell, Michigan (“Bank”);

 

WHEREAS, the Bank, by and through its duly elected and acting Board of Directors
(“Board”), has executed a Stipulation and Consent to the Issuance of a Consent
Order (“Stipulation and Consent”), dated October 31, 2013 that is accepted by
the Comptroller through his duly authorized representative; and

 

WHEREAS, by this Stipulation and Consent, which is incorporated by reference,
the Bank has consented to the issuance of this Consent Order (“Order”) by the
Comptroller;

 

NOW, THEREFORE, pursuant to the authority vested in him by the Federal Deposit
Insurance Act, as amended, 12 U.S.C. § 1818, the Comptroller hereby orders that:

 

ARTICLE I

 

COMPLIANCE COMMITTEE

 

(1)  The Compliance Committee appointed by the Board pursuant to the September
24, 2009, Order (“2009 Order”) shall continue to consist of at least three (3)
directors of which at least two (2) shall not be employees, former employees, or
controlling shareholders of the Bank or any of its affiliates (as the term
“affiliate” is defined in 12 U.S.C. § 371c(b)(1)), or a family member of any
such person. In the event of a change of the membership, the name of any new
member shall be immediately submitted in writing to the Director for Special
Supervision (“Director”). The Compliance Committee shall be responsible for
monitoring and coordinating the Bank’s adherence to the provisions of this
Order.

 

 

 

 

(2)  The Compliance Committee shall meet at least monthly.

 

(3)  Within thirty (30) days of the date the Compliance Committee last submitted
a written progress report to the Board under the terms of the 2009 Order, the
Compliance Committee shall issue a report to the Board and thereafter issue such
report to the Board every thirty (30) days setting forth in detail:

 

(a)a description of the actions needed to achieve full compliance with each
Article of this Order, Bank personnel responsible for implementing the
corrective actions, and the timeframes for completion;

 

(b)actions taken to comply with each Article of this Order; and

 

(c)the results and status of those actions.

 

(4)  The Board shall forward a copy of the Compliance Committee's reports, with
any additional comments by the Board, to the Director within ten (10) days of
receiving such report.

 

ARTICLE II

 

STRATEGIC PLAN

 

(1)  Within thirty (30) days of the date of this Order, the Board shall forward
to the Director for his review, pursuant to paragraph (3) of this Article, an
acceptable, written Strategic Plan for the Bank, covering at least a two-year
period. The Strategic Plan shall establish objectives for the Bank’s overall
risk profile, earnings performance, growth, balance sheet mix, off-balance sheet
activities, liability structure, capital and liquidity adequacy, together with
strategies to achieve those objectives, and shall, at a minimum, include:

 

(a)a mission statement that forms the framework for the establishment of
strategic goals and objectives;

 

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(b)the strategic goals and objectives to be accomplished, including key
financial indicators and risk tolerances;

 

(c)an assessment of the Bank’s strengths, weaknesses, opportunities, and threats
that impact strategic goals and objectives;

 

(d)an identification and prioritization of initiatives and opportunities,
including timeframes that take into account the requirements of this Order;

 

(e)a description of the Bank’s targeted market(s), competitive factors in its
identified target market(s) and a description of control systems to mitigate
risks in the Bank’s markets;

 

(f)a financial forecast, to include projections for major balance sheet and
income statement accounts, targeted financial ratios, and growth projections
over the period covered by the Strategic Plan;

 

(g)a description of the assumptions used to determine financial projections and
growth targets;

 

(h)an assessment of the present and planned product lines (assets and
liabilities), including the Bank’s trust activities, and the identification of
appropriate risk management systems to identify, measure, monitor, and control
risks within the product lines;

 

(i)an evaluation of the Bank's internal operations, staffing requirements,
salary and related compensation, board and management information systems, and
policies and procedures for their adequacy and contribution to the
accomplishment of the goals and objectives established in the Strategic Plan;

 

(j)specific actions to improve Bank earnings and asset quality and reduce the
level of concentrations of credit;

 

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(k)strategies to reduce rollover risk and maintain sufficient liquidity at
reasonable costs, including maintaining sufficient asset based liquidity and
diversification of funding sources without significant reliance on high cost
providers;

 

(l)assigned responsibilities and accountability for the strategic planning
process; and

 

(m)description of systems and metrics designed to monitor the Bank’s progress in
meeting the Strategic Plan’s goals and objectives.

 

(2)  If the Board’s Strategic Plan under paragraph (1) of this Article includes
a proposed sale or merger of the Bank, the Strategic Plan shall, at a minimum,
address the steps that will be taken and the associated timeline to effect the
implementation of that alternative.

 

(3)  Prior to adoption by the Board, a copy of the Strategic Plan and any
subsequent amendments or revisions shall be submitted to the Director for review
and prior written determination of no supervisory objection. At the next Board
meeting following receipt of the Director’s written determination of no
supervisory objection, the Board shall adopt and the Bank, subject to Board
review and ongoing monitoring, shall immediately implement and ensure adherence
to the Strategic Plan and any amendments or revisions thereto.

 

(4)  The Bank may not initiate any action that deviates significantly1 from the
Strategic Plan without a written determination of no supervisory objection from
the Director. The Board must give the Director at least thirty (30) days advance
written notice of its intent to deviate significantly from the Strategic Plan,
along with an assessment of the impact of such change on the Bank’s condition,
including a profitability analysis and an evaluation of the adequacy of the
Bank’s organizational structure, staffing, management information systems,
internal controls, and written policies and procedures to identify, measure,
monitor, and control the risks associated with the change in the Strategic Plan.

 

 

1 For the purposes of this Consent Order, changes that may constitute a
significant deviation from the Strategic Plan include, but are not limited to, a
change in the Bank's marketing strategies, products and services, marketing
partners, underwriting practices and standards, credit administration, account
management, collection strategies or operations, fee structure or pricing,
accounting processes and practices, or funding strategy, any of which, alone or
in the aggregate, may have a material impact on the Bank's operations or
financial performance; or any other changes in personnel, operations, or
external factors that may have a material impact on the Bank's operations or
financial performance.

 

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(5)  At least quarterly, the Board shall prepare a written evaluation of the
Bank’s performance against the Strategic Plan that includes a description of the
actions the Board will require the Bank to take to address any shortcomings,
which shall be documented in the Board meeting minutes. Upon completion of its
evaluation, the Board shall submit a copy to the Director.

 

(6)  The Board shall review and update the Strategic Plan at least annually and
more frequently if necessary or if required by the Director in writing. If the
Strategic Plan includes any significant deviations, the Board shall submit a
copy of the updated Strategic Plan pursuant to the requirements of paragraph (3)
of this Article for the Director’s review and prior written determination of no
supervisory objection.

 

(7)  Until the Strategic Plan required under this Article has been submitted by
the Board for the Director’s review, has received a written determination of no
supervisory objection from the Director, and is being implemented by the Bank,
the Bank shall not significantly deviate from the products, services, asset
composition and size, funding sources, structure, operations, policies,
procedures, and markets of the Bank that existed before this Order without first
obtaining the Director’s prior written determination of no supervisory objection
to such significant deviation. Any request to the Director for prior written
determination of no supervisory objection to a significant deviation must be
submitted to the Director at least thirty (30) days in advance of the
significant deviation, along with an assessment of the impact of such change on
the Bank’s condition, including a profitability analysis and an evaluation of
the adequacy of the Bank’s organizational structure, staffing, management
information systems, internal controls, and written policies and procedures to
identify, measure, monitor, and control the risks associated with the change.

 

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ARTICLE III

 

CAPITAL PLAN AND HIGHER MINIMUMS

 

(1)  Within ninety (90) days of the date of this Order, the Bank shall meet and
maintain the following capital ratios (as defined in 12 C.F.R. Part 3):

 

(a)Tier 1 capital to adjusted total asset ratio at least equal to eight and
one-half percent (8.5%); and

 

(b)Total risk-based capital ratio at least equal to eleven percent (11%).

 

(2)  The requirement in this Order to meet and maintain specific capital levels
means that the Bank may not be deemed to be “well capitalized” for purposes of
12 U.S.C. § 1831o and 12 C.F.R. Part 6, pursuant to 12 C.F.R. § 6.4(b)(1)(iv).

 

(3)  Within thirty (30) days of the date of this Order, the Board shall develop,
document, and implement an effective internal capital planning process to assess
the Bank’s capital adequacy in relation to its overall risks and to ensure
maintenance of appropriate capital levels, which shall in no event be less than
the requirements of paragraph (1) of this Article. The capital planning process
shall be consistent with OCC Bulletin 2012-16 (June 7, 2012), Guidance for
Evaluating Capital Planning and Adequacy, and shall ensure the integrity,
objectivity, and consistency of the process through adequate governance. The
Board shall document the capital planning process at least annually or more
frequently if requested by the Director in writing.

 

(4)  Within thirty (30) days of the date of this Order, the Board shall forward
to the Director for his review, pursuant to paragraph (6) of this Article, a
written Capital Plan for the Bank, consistent with the Strategic Plan pursuant
to Article II, covering at least a two (2) year period. The Capital Plan shall,
at a minimum:

 

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(a)include specific plans to achieve and maintain adequate capital, which may in
no event be less than the requirements of paragraph (1) of this Article;

 

(b)identify and evaluate all material risks;

 

(c)determine the Bank’s capital needs in relation to material risks and
strategic direction, as set forth in the Strategic Plan;

 

(d)identify and establish a strategy to maintain capital adequacy and strengthen
capital, and establish a contingency or back-up capital plan commensurate with
the Bank’s overall risk and complexity;

 

(e)include specific plans detailing how the Bank will comply with restrictions
or requirements set forth in this Order, and with 12 U.S.C. § 1831o, including
the restrictions regarding brokered deposits in 12 C.F.R. § 337.6; and

 

(f)include detailed quarterly financial projections.

 

(5)  The Bank may declare or pay a dividend or make a capital distribution only:

 

(a)when the Bank is in compliance with a Capital Plan that has received a
written determination of no supervisory objection and would remain in compliance
with its approved Capital Plan immediately following the declaration or payment
of the dividend or the capital distribution;

 

(b)when the Bank is in compliance with 12 U.S.C. §§ 56 and 60; and

 

(c)following the prior written determination of no supervisory objection by the
Director.

 

(6)  Prior to its adoption by the Board, a copy of the Capital Plan shall be
submitted to the Director for a prior written determination of no supervisory
objection. The Board shall review and update the Bank’s Capital Plan at least
annually and more frequently if necessary or if required by the Director in
writing. Revisions to the Bank’s Capital Plan shall be submitted to the Director
for a prior written determination of no supervisory objection. At the next Board
meeting following receipt of the Director’s written determination of no
supervisory objection, the Board shall adopt and the Bank, subject to Board
review and ongoing monitoring, shall implement and thereafter ensure adherence
to the Capital Plan and any amendments or revisions thereto.

 

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(7)  At least quarterly, the Board shall prepare a written evaluation of the
Bank’s performance against the Capital Plan and shall include a description of
the actions the Board will require the Bank to take to address any deficiencies,
which shall be documented in the Board meeting minutes. Upon completion of its
evaluation, the Board shall submit a copy to the Director within ten (10) days.

 

(8)  If the Bank fails to maintain capital ratios required by paragraph one (1)
of this Article or fails to implement an acceptable written Capital Plan to
which the Director has provided a written determination of no supervisory
objection, then the Bank may, in the Director’s sole discretion, be deemed
undercapitalized for purposes of this Order. The Bank shall take such corrective
measures as the OCC may direct in writing from among the provisions applicable
to undercapitalized depository institutions under 12 U.S.C. § 1831o(e) and 12
C.F.R. Part 6. For purposes of this requirement, an action “necessary to carry
out the purpose of this section” under 12 U.S.C. § 1831o(e)(5) shall include
restoration of the Bank’s capital to the minimum ratios required by paragraph
one (1) of this Article, and any other action deemed necessary by the OCC to
address the Bank’s capital deficiency or the safety and soundness of its
operations.

 

ARTICLE IV

 

BOARD TO ENSURE EFFECTIVE MANAGEMENT AND BOARD STRUCTURE

 

(1)  The Board must ensure that the Bank has competent and effective executive
management in place on a full time basis to achieve the Board’s Strategic Plan,
execute Board established policies, ensure compliance with this Order,
applicable laws, rules and regulations, and manage the day-to-day operations of
the Bank in a safe and sound manner.

 

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(2)  Within ninety (90) days of the date of this Order, the Board shall adopt
and implement appropriate corporate governance and decision-making processes to
correct the Bank’s deficiencies in management and Board oversight as described
in the Bank’s recent supervisory history, including the most recent Report of
Examination (“ROE”). At a minimum, the Board shall ensure and document that:

 

(a)all executive officers are capable of performing present and anticipated
duties, factoring in each executive officer’s past actual performance,
experience, and qualifications, compared to each position’s description, duties
and responsibilities, with particular emphasis on proposed responsibilities to
execute the Strategic Plan and correct the concerns raised in the ROE;

 

(b)clear lines of responsibility and authority exist for each executive officer,
including but not limited to, the President, Chief Executive Officer, Senior
Loan Officer, Chief Credit Officer, and Chief Financial Officer;

 

(c)a management employment and succession program to promote the retention and
continuity of capable management;

 

(d)sufficient policies, processes, personnel, and control systems exist to
effectively implement and ensure adherence to all provisions of this Order, and
to ensure that Bank personnel have sufficient training and authority to execute
their duties and responsibilities under this Order; and

 

(e)that the Board receives and reviews sufficient Bank information from
management to enable the Board to provide effective oversight and to enable each
Director to fulfill his or her fiduciary duties and other responsibilities under
law and as outlined in the OCC’s The Directors Handbook and “Duties and
Responsibilities of Directors” booklet of the Comptroller’s Handbook.

 

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(3)  The Board must ensure a competent and diverse Board of independent
directors that have sufficient banking and bank regulatory experience. The Board
must assess the composition of the Board and add at least one (1) new
independent director with prior banking experience to the Board.  The term
"independent director" means a person who is not an officer or employee of the
Bank, and who is not:

 

(a)a director, officer or employee of any affiliate of the Bank;

 

(b)a director, officer or employee of any related interest (as that term is
defined in 12 C.F.R. § 215) of any current director, or

 

(c)a relative of any current director.

 

(4)  The Bank may pay director fees and bonuses to executive management only:

 

(a)when the Bank is in compliance with the Capital Plan and Strategic Plan that
have received a written determination of no supervisory objection and would
remain in compliance with its approved Capital Plan immediately following the
payment of director fees and bonuses to executive management; and

 

(b)following the prior written determination of no supervisory objection by the
Director.

 

(5)  Within ninety (90) days, the Compliance Committee or a designated committee
of independent directors must develop, adopt, and implement a Compensation
Program that, at a minimum, requires the Board to establish procedures to:

 

(a)develop, at least annually, appropriate objectives and measurements for all
executive and non-executive employees, including the objective to execute their
duties and responsibilities under this Order;

 

(b)perform an annual written performance evaluation for all employees;

 

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(c)designate the Compliance Committee or a designated committee of independent
directors to perform an annual written performance evaluation of, each executive
officer’s performance according to her or his position’s description and
responsibilities,. Each annual written performance appraisal also must address
the following as it applies to each executive officer:

 

i.compliance with objectives established by the Board;

 

ii.compliance with Board-approved policies and procedures;

 

iii.compliance with Board-approved strategic and capital plans;

 

iv.compliance with action plans to correct issues raised in Reports of
Examination or audit reports; and

 

v.compliance with laws, regulations, and regulatory guidance.

 

(d)address any deficiencies identified pursuant to sections (a) through (c) of
this paragraph; and

 

(e)set annual compensation for each employee that, at a minimum:

 

i.is market based, reasonable, and proportionate to the services rendered;

 

ii.considers the condition of the Bank;

 

iii.is consistent with an approved Strategic Plan required under the Order;

 

iv.complies with OCC Bulletin 2010-24; and

 

v.complies with 12 C.F.R. Part 30.

 

(6)  The Bank shall not renew or enter into new contracts or engagements with a
third party company, entity, or person, including the Bank’s holding company or
an affiliate as that term is defined in 12 U.S.C. § 371c and 12 C.F.R. § 223.2,
(“third party”) to perform services for, or on behalf of, the Bank unless the
engagements are in compliance with OCC Bulletin 2001-47 (Third Party
Relationships) (November 1, 2001). The Bank must also routinely monitor and
document its review of the performance and activities of each third party and
shall immediately take appropriate action if the third party is not complying
with the written contract or engagement and shall maintain documentation of any
such action.

 

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(7)  Within thirty (30) days of this Order, the Board shall take the necessary
steps to ensure that the Bank timely files complete and accurate Consolidated
Reports of Condition and Income (“Call Reports”) in accordance with the Federal
Financial Institutions Examination Counsel’s “Instructions for Preparation of
Consolidated Reports of Condition and Income,” to include at a minimum:

 

(a)the designation of an officer with the knowledge, skills, and abilities
necessary to ensure the Bank timely and accurately files its Call Reports;

 

(b)training of appropriate Bank personnel in Call Report preparation;

 

(c)procedures to ensure the Bank retains documentation providing an appropriate
audit trail for all Call Report schedules; and,

 

(d)the performance of an independent review and verification of the accuracy of
all Call Report schedules in advance of each Call Report filing.

 

ARTICLE V

 

AFFILIATE TRANSACTIONS

 

(1)  Within sixty (60) days of the date of this Order, the Board shall develop
an effective written affiliate transactions policy that complies with 12 C.F.R.
Part 223 and 12 U.S.C. §§371c and 371c-1. The Board shall thereafter adopt and
the Bank, subject to Board review and ongoing monitoring, shall immediately
implement and thereafter ensure adherence to the affiliate transactions policy.
The policy shall include, but is not limited to the following:

 

(a)mandatory annual training for appropriate Bank staff and the Board;

 

(b)procedures to identify and maintain a current list of Bank’s affiliates;

 

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(c)procedures to identify and report to the Board all Bank affiliate
transactions, as well as non-affiliate transactions that benefit an affiliate
pursuant to 12 C.F.R. § 223.16(a);

 

(d)procedures for identifying, allocating, and supporting any shared expenses
with an affiliate, if the Bank shares resources, products, services, or
personnel;

 

(e)a centralized system of affiliate transactions records to facilitate
compliance reviews by the Board and independent reviewers; and

 

(f)an independent annual review, by a qualified third-party, of the Bank’s
compliance with affiliate transactions laws and regulations and confirmation
that each affiliate transaction is accurately recorded on the Bank’s books.

 

(2)  From the effective date of this Order, the Board is prohibited from
entering into any arrangement, activity, or fee arrangement that would result in
the transfer, reduction, or depletion of the Bank’s capital base for the benefit
of another affiliate, insider, or related entity, unless the arrangement,
activity, or fee arrangement is based on market value, as defined in 12 C.F.R.
Part 223 and 12 U.S.C. §§ 371c and 371c-1.

 

(3)  The Bank may directly or indirectly pay money or provide other compensation
to or for the benefit of its affiliates, extend credit in any form, including
overdrafts, to or for the benefit of its affiliates, transfer assets between the
Bank and its affiliates, or enter into or engage in any transaction that
obligates the Bank to do any of the foregoing only after:

 

(a)the Board has reviewed the proposed transaction and has documented the review
in writing;

 

(b)the Board has determined in writing that it is advantageous for the Bank to
engage in such action and that the transaction complies with all applicable
laws, rules, regulations, and Comptroller’s issuances, including, but not
limited to 12 C.F.R. Part 223; and

 

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(c)the Board approves the transaction in writing.

 

(4)  For purposes of this Order, “affiliate” shall have the meaning set forth in
12 U.S.C. § 221a and 12 C.F.R. Part 223.

 

ARTICLE VI

 

LOAN REVIEW

 

(1)  Within sixty (60) days of the date of this Order, the Board shall implement
systems to ensure adherence to an effective, independent, and on-going loan
review system to review, at least quarterly, the Bank’s loan and lease
portfolios to ensure the timely identification and categorization of problem
credits. The system shall provide for a quarterly written report to be filed
with the Board or a designated committee thereof after each review and shall use
a loan and lease grading system consistent with the guidelines set forth in
“Rating Credit Risk” and “Allowance for Loan and Lease Losses” booklets of the
Comptroller’s Handbook and “Uniform Retail Credit Classification and Account
Management Policy” for consumer loans. Further, the loan review system will be
consistent with generally accepted accounting principles (“GAAP”). Such
quarterly reports shall be expanded to include conclusions regarding:

 

(a)the credit quality of the consumer and commercial loan and lease portfolios
relative to the Bank’s risk profile and capital levels;

 

(b)the identification, type, rating, and amount of problem loans and leases;

 

(c)the identification and amount of delinquent and nonaccrual loans and leases;

 

(d)the identification and status of credit-related violations of law, rule, or
regulation;

 

(e)concentrations of credit;

 

(f)the accuracy of internal risk ratings and nonaccrual recognition;

 

(g)the accuracy of the Bank’s identification of troubled debt restructurings;

 

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(h)loans and other extensions of credit that are exceptions to or not in
compliance with the Bank’s lending policies and procedures;

 

(i)the accuracy of specific allocations to the Allowance for Loan and Lease
Losses (“ALLL”); and

 

(j)the Bank’s compliance with regulatory and accounting guidelines for managing
and accounting for its Other Real Estate Owned.

 

(2)  The Board shall continue to evaluate the loan review written report(s) and
shall ensure that immediate, adequate, and continuing remedial action is taken
to correct any deficiencies noted in the report(s).

 

ARTICLE VII

 

LOAN PORTFOLIO MANAGEMENT

 

(1)  Within sixty (60) days of the date of this Order, the Board shall revise
the Bank’s credit policy, consistent with the “Loan Portfolio Management”
booklet of the Comptroller’s Handbook, and thereafter adopt and adhere to the
revised credit policy to improve the Bank's loan portfolio management. At a
minimum, the Board must revise the credit policy to address documentation,
underwriting, and administration of consumer and commercial loans, indirect
loans, Other Real Estate Owned, the Bank’s concentrations of credit program, and
any other deficiencies in the Bank’s lending procedures noted in the most recent
ROE.

 

(2)  Within thirty (30) days of the date of this Order, the Board shall ensure
that the Bank revises and adopts an adequate overdraft policy and procedures in
accordance with OCC Bulletin 2005-9 and OCC Bulletin 2010-15.

 

(3)  The Board shall ensure that all Bank lenders or any other personnel
performing credit analyses are adequately trained in cash flow analysis,
particularly global cash flow analysis, evaluation of contingent liabilities,
and verification of liquidity.

 

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(4)  The Board shall ensure that the Bank has adequate Management Information
Systems (“MIS”), including adequate and accurate loan policy exception and
concentration of credit reports, to ensure that the Board and management receive
timely and accurate information.

 

(5)  Except as otherwise provided herein, the Bank shall obtain current and
complete credit information on all loans lacking such information, including
those listed in the most recent ROE, in any subsequent Report, in any internal
or external loan review, or in any listings of loans lacking such information
provided to management by the OCC within sixty (60) days from receipt of such
information. The Bank shall maintain a list of all credit exceptions, noting
those that have not been corrected within the sixty (60) day timeframe. This
list shall include an explanation of the actions taken to correct the exception,
the reasons for the exception, and a plan to correct the exception.

 

(6)  Except as otherwise provided herein, the Bank shall ensure proper
collateral documentation on all loans and correct each collateral exception
listed in the most recent ROE, in any subsequent Report, in any internal or
external loan review, or in any listings of loans lacking such information
provided to management by the OCC National Bank Examiners within sixty (60) days
from the receipt of such information. The Bank shall maintain a list of all
collateral exceptions, noting those that have not been corrected within the
sixty (60) day timeframe. This list shall include an explanation of the actions
taken to correct the exception, the reasons for the continuing exception, and a
plan to correct the exception.

 

(7)  The Bank’s documentation for all decisions to grant, extend, renew, alter
or restructure any loan or other extension of credit, including loan
participations, shall include:

 

(a)the specific reason or purpose for the extension of credit;

 

(b)the expected source of repayment;

 

(c)an analysis demonstrating that repayment terms coincide with the expected
source of repayment;

 

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(d)current and satisfactory credit information and analysis, including cash flow
analysis, where loans are to be repaid from operations; and

 

(e)the value of collateral with supporting material and records of the Bank’s
lien, when applicable.

 

(8)  Failure to obtain the information in paragraph (7) shall require a majority
of the full Board (or its designated committee thereof) to certify in writing
the specific reasons why obtaining and analyzing the information in paragraph
(7) would be detrimental to the best interests of the Bank. A copy of the
certification of the Board or its designated committee shall be maintained in
the credit file of the affected borrower(s).

 

ARTICLE VIII

 

CONCENTRATIONS OF CREDIT

 

(1)  Within ninety (90) days of the date of this Order, the Board shall revise
the written concentration risk management program for identifying, monitoring,
and controlling risks associated with concentrations of credit, consistent with
the guidance set forth in OCC Bulletin 2006-46 (December 6, 2006),
Concentrations in Commercial Real Estate Lending, Sound Risk Management
Practices: Interagency Guidance on CRE Concentration Management, and the
“Concentrations of Credit” booklet of the Comptrollers’ Handbook (December 13,
2011). The program shall be revised to address:

 

(a)all concentrations of credit-related corrective actions required in the most
recent ROE;

 

(b)appropriate strategies for managing concentration levels, including a
contingency plan to reduce or mitigate concentrations deemed imprudent for the
Bank’s earnings, capital, or in the event of adverse market conditions; and

 

(c)quarterly reports to the Board, which shall at a minimum include the
following:

 

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(i)a summary of concentration levels, by type and sub-type;

 

(ii)a summary of the Bank’s market analysis;

 

(iii)strategies implemented to ensure or obtain compliance when concentrations
approach or exceed Board-approved limits; and

 

(iv)a summary of changes in risk levels by concentration type and sub-type, with
discussion of recommended changes in credit administration procedures (i.e.,
underwriting practices, risk rating, monitoring, training).

 

(2)  Upon completion, the Board shall thereafter adopt and the Bank, subject to
Board review and ongoing monitoring, shall immediately implement and thereafter
ensure adherence to the written concentration management program.

 

ARTICLE IX

 

OTHER REAL ESTATE OWNED

 

(1)  Within sixty (60) days of the date of this Order, the Board shall revise
the written Other Real Estate Owned (“OREO”) program to ensure compliance with
12 U.S.C. § 29 and 12 C.F.R. Part 34 and the Other Real Estate Owned booklet of
the Comptroller’s Handbook. The Board shall implement systems to ensure that
repossessed assets are legally held by the Bank, and if applicable, in
accordance with 12 C.F.R. § 5.34 and 12 C.F.R. § 5.36. The revised OREO program
shall, at a minimum, address and include:

 

(a)accounting procedures for OREO properties and repossessed assets, including
valuation methods and treatment of expenses, are in accordance with GAAP and the
instructions to the Consolidated Report of Condition;

 

(b)procedures to require timely, independent, and periodic OREO appraisals
pursuant to 12 C.F.R. § 34.85 and 12 C.F.R. Part 34, Subpart C and timely
evaluations for repossessed assets;

 

18

 

 

(c)procedures to improve existing files for each OREO property and repossessed
asset to include:

 

i.valuation analysis and accounting for each OREO property, including the
appraisal and all supporting documentation;

 

ii.analysis of the OREO property, which compares the cost to carry against the
financial benefits of near term sale; and

 

iii.a detailed marketing strategy and targeted time frames for disposing of each
OREO property;

 

(d)requirements for providing monthly reports to the Board on the status of each
OREO property and its disposition.

 

(2)  Upon completion, the Board shall thereafter adopt and the Bank, subject to
Board review and ongoing monitoring, shall immediately implement and thereafter
ensure adherence to the written, revised OREO program.

 

ARTICLE X

 

CRITICIZED ASSETS

 

(1)  The Bank shall implement its existing written criticized asset program
designed to eliminate the basis of criticism of those assets criticized as
“doubtful,” “substandard,” or “special mention” in the most recent ROE, in any
subsequent ROE, by any internal or external loan review, or in any list provided
to management by the OCC Examiners during any examination.

 

(2)  The Bank shall maintain Criticized Asset Reports (“CAR(s)”) identifying all
credit relationships and other assets totaling in the aggregate two hundred and
fifty thousand dollars ($250,000) or more, criticized as “doubtful,”
“substandard,” or “special mention.” Management shall update and submit the CARs
to the Board monthly and to the Director quarterly. Each CAR shall continue to
cover an entire credit relationship and management shall update the existing CAR
format to include the following:

 

19

 

 

(a)the appraised value of supporting collateral, along with the date and source
of the appraisal, and the position of the Bank’s lien on such collateral, as
well as other necessary documentation to support the current collateral
valuation;

 

(b)an analysis of current and complete credit information, including a global
cash flow analysis where loans are to be repaid from operations;

 

(c)results of any impairment analysis as required under Accounting Standards
Codification (“ASC”) Topic 310;

 

(d)accurate risk ratings consistent with the classification standards contained
in the Comptroller’s Handbook on “Rating Credit Risk”;

 

(e)appropriate accrual status pursuant to the FFIEC Instructions for the
Preparation of Consolidated Reports of Condition and Income; and

 

(f)the proposed action to eliminate the basis of criticism and the time frame
for its accomplishment, including, if appropriate, an exit strategy.

 

(3)  The Board or a designated committee shall approve risk rating upgrades on
all assets criticized as “doubtful,” “substandard,” or “special mention” above
twenty five (25) thousand dollars. This process shall include, at a minimum:

 

(a)a requirement for management to provide the Board or designated committee
with a financial analysis using actual and complete financial information to
support the risk rating and accrual changes;

 

(b)an independent third party review of changes in risk rating and accrual
status on problem loans as part of the independent loan review;

 

20

 

 

(c)documentation of approval of risk rating and accrual changes in the minutes
of the appropriate Board or designated committee. The minutes must contain, at a
minimum, the name of the borrower, loan amounts, existing risk rating, proposed
risk rating, and a brief summary of the reason for the change in risk rating.;
and

 

(d)documentation of the approval in the borrower’s loan file along with the
associated credit analysis.

 

(4)  The Bank shall not extend credit, directly or indirectly, including
renewals, modifications or extensions, to a borrower whose loans or other
extensions of credit are criticized in any ROE, in any internal or external loan
review, or in any list provided to management by the OCC Examiners, unless and
until a majority of the Board, or a designated committee thereof, finds and
documents in writing that each of the following conditions is met:

 

(a)the extension of credit is necessary to promote the best interests of the
Bank and why such extension is necessary;

 

(b)a written credit and collateral analysis is performed; and

 

(c)the Bank’s workout strategy for that borrower will not be compromised by the
extension of credit.

 

ARTICLE XI

 

APPRAISAL AND EVALUATION PROCESS 

 

(1)  Within thirty (30) days of the date of this Order, the Board shall revise
and adopt, and the Bank, subject to Board review and ongoing monitoring, shall
implement and thereafter ensure adherence to a revised real estate appraisal
program that addresses appraisals and evaluations prior to and after the credit
decision. The revised program shall be consistent with 12 C.F.R. Part 34 and the
“Interagency Appraisal and Evaluation Guidelines,” included in OCC Bulletin
2010-42 (December 10, 2010). The Bank’s real estate appraisal program shall
include specific criteria for:

 

21

 

 

(a)use of appraisals versus evaluations;

 

(b)obtaining reappraisals or reevaluations;

 

(c)whether an existing appraisal or evaluation may be used to support a
subsequent transaction;

 

(d)the content and appropriate use of evaluations consistent with safe and sound
banking practices;

 

(e)ensuring that appraisals and evaluations contain sufficient information to
support the credit decision;

 

(f)an adequate appraisal review and analysis process;

 

(g)internal controls that promote compliance with these program standards,
including those related to monitoring third party arrangements;

 

(h)collateral valuation monitoring; and

 

(i)obtaining appraisals or evaluations for transactions that are not otherwise
covered by the appraisal requirements of 12 C.F.R. Part 34.

 

(2)  The Board shall continue to require and the Bank shall continue to obtain a
current independent appraisal or updated appraisal, in accordance with 12 C.F.R.
Part 34, on any loan that is secured by real property:

 

(a)where the loan’s appraisal was found to violate 12 C.F.R. Part 34; or

 

(b)where the loan was criticized in the most recent ROE or by the Bank's
internal or external loan review and the most recent independent appraisal is
more than twelve (12) months old; or

 

22

 

 

(c)where the borrower has failed to comply with the contractual terms of the
loan agreement and the loan officer’s analysis of current financial information
does not support the ongoing ability of the borrower or guarantor(s) to perform
in accordance with the contractual terms of the loan agreement and the most
recent independent appraisal is more than twelve (12) months old.

 

(3)  Appraisals required by paragraph (2) of this Article shall continue to be
ordered within thirty (30) days following the event triggering the appraisal
requirement, for delivery to the Bank within sixty (60) days of ordering.

 

ARTICLE XII

 

ALLOWANCE FOR LOAN AND LEASE LOSSES

 

(1)  The Board shall revise the Bank’s written ALLL policies and procedures, and
maintain an adequate ALLL, in accordance with GAAP. The Board shall adopt
revised ALLL policies and procedures that are consistent with the guidance set
forth in OCC Bulletins 2001-37 (July 20, 2001), 2006-47 (December 13, 2006), and
OCC Bulletin 2012-6 (January 31, 2012) and with the “Allowance for Loan and
Lease Losses,” booklet of the Comptroller’s Handbook. The policies and
procedures shall include:

 

(a)internal loan risk ratings;

 

(b)criteria for determining which loans will be reviewed under ASC Topic 310,
how impairment will be determined, and procedures to ensure the analysis of
loans complies with ASC 310 requirements;

 

(c)recognition of non-accrual loans in conformance with GAAP and regulatory
guidance;

 

(d)criteria for determining loan pools under ASC 450 and an analysis of those
loan pools; and

 

23

 

 

(e)a reasonable assessment of qualitative factors in the ASC 450 analysis.

 

(2)  The Board shall review the ALLL at least once each calendar quarter and
shall correct any deficiency in the ALLL in the quarter it is discovered, prior
to the filing of the Consolidated Reports of Condition and Income, by additional
provisions from earnings. The Board shall continue to maintain written
documentation of the factors considered and conclusions it reaches in
determining the adequacy of the ALLL.

 

(3)  A copy of the Board’s revised ALLL policy and procedures, and any
subsequent revisions, shall be submitted to the Director.

 

ARTICLE XIII

 

INTERNAL AUDIT

 

(1) Within ninety (90) days of the date of this Order, the Board shall adopt,
implement, and ensure adherence to an independent, internal audit program
sufficient to:

 

(a)detect irregularities and weak practices in the Bank’s operations;

 

(b)determine the Bank’s level of compliance with all applicable laws, rules and
regulations, including trust, overdrafts, and affiliate and insider
transactions;

 

(c)determine the Bank’s conformance with regulatory guidance and standards;

 

(d)assess and report the effectiveness of policies, procedures, controls, and
management oversight relating to accounting and financial reporting;

 

(e)evaluate the Bank’s adherence to established policies and procedures,
including the Bank’s adherence to its loan policies, underwriting standards,
problem loan identification, and classification;

 

(f)adequately and timely cover Bank activities to maintain or improve the
efficiency and effectiveness of the Bank’s risk management, internal controls,
and corporate governance functions;

 

24

 

 

(g)identify guidelines and expectations for the internal audit risk assessment,
audit plan procedures and reports to include all auditable areas of the Bank;

 

(h)identify the internal controls associated with each auditable area of the
Bank;

 

(i)identify appropriate audit procedures to test internal controls for each
auditable area;

 

(j)ensures the designated Internal Auditor receives sufficient support or
training if an audit requires specific knowledge or skill the Internal Auditor
does not possess; and

 

(k)ensure timely follow-up on identified deficiencies to ensure their
correction.

 

(2) The Board shall ensure management undertakes immediate actions to correct
deficiencies cited in audit reports and maintains a written record describing
the deficiency, the corrective action, and the status of the corrective action.
The Board shall ensure that management provides detailed written explanations
where the deficiencies cannot be remedied, and that the audit staff maintains a
written record describing those actions. The Board shall provide for a timely
independent written follow-up for any uncorrected deficiencies.

 

ARTICLE XIV

 

VIOLATIONS OF LAW 

 

(1)  The Board shall take all necessary steps to correct each violation of law,
rule, or regulation cited in the most recent ROE or any subsequent ROE, or
brought to the Board’s or Bank’s attention in writing by management, regulators,
auditors, loan review, or other compliance efforts. Within sixty (60) days after
the violation is cited or brought to the Board’s or Bank’s attention, the Bank
shall provide to the Board a list of any violations that have not been
corrected. This list shall include an explanation of the actions taken to
correct the violation, the reasons why the violation has not yet been corrected,
and a plan to correct the violation by a specified date.

 

25

 

 

(2)  The monthly progress reports required by Article I of this Order shall
include the date and manner in which each correction has been effected during
that reporting period.

 

(3)  Within sixty (60) days, the Board shall adopt and the Bank, subject to
Board review and ongoing monitoring, shall implement and thereafter ensure
adherence to:

 

(a)specific procedures to prevent violations cited in the most recent ROE; and

 

(b)general procedures addressing compliance management that incorporate internal
control systems and education of employees regarding laws, rules, and
regulations applicable to their areas of responsibility.

 

ARTICLE XV

 

OTHER PROVISIONS

 

(1)  Although the Bank is by this Order required to submit certain proposed
actions and programs for the review or prior written determination of no
supervisory objection of the Director, the Board has the ultimate responsibility
for proper and sound management of the Bank and the completeness and accuracy of
the Bank’s books and records.

 

(2)  It is expressly and clearly understood that if, at any time, the
Comptroller deems it appropriate in fulfilling the responsibilities placed upon
him by the several laws of the United States of America to undertake any action
affecting the Bank, nothing in this Order shall in any way inhibit, estop, bar
or otherwise prevent the Comptroller taking such action.

 

(3)  Each citation or referenced guidance included in this Order includes any
subsequent guidance that replaces, supersedes, amends, or revises the cited law,
regulation, or guidance.

 

(4)  The provisions of this Order are effective upon issuance by the
Comptroller, through his authorized representative whose hand appears below, and
shall remain effective and enforceable, except to the extent that, and until
such time as, any provisions of this Order shall have been amended, suspended,
waived, or terminated in writing by the Comptroller, through his authorized
representative.

 

26

 

 

(5)  Except as otherwise expressly provided herein, any time limitations imposed
by this Order shall begin to run from the effective date of this Order.

 

(6)  If the Bank requires a waiver or suspension of any provision or an
extension of any timeframe within this Order, the Board shall submit a written
request to the Director asking for relief. Any written requests submitted
pursuant to this Article shall include a statement setting forth in detail, with
relevant supporting documentation, the special facts and circumstances that
support the waiver or suspension of any provision or an extension of a timeframe
within this Order.

 

(7)  The Director’s decision concerning a request submitted pursuant to
paragraph six (6) of this Article is final and not subject to further review.

 

(8)  In each instance in this Order in which the Board or a Board committee is
required to ensure adherence to and undertake to perform certain obligations of
the Bank, it is intended to mean that the Board shall:

 

(a)authorize and adopt such actions on behalf of the Bank as may be necessary
for the Bank to perform its obligations and undertakings under the terms of this
Order;

 

(b)require the timely reporting by Bank management of such actions directed by
the Board to be taken under the terms of this Order;

 

(c)follow-up on any non-compliance with such actions in a timely and appropriate
manner; and

 

(d)require corrective action be taken in a timely manner of any non-compliance
with such actions.

 

27

 

 

(9)  This Order is intended to be, and shall be construed to be, a final order
issued pursuant to 12 U.S.C. § 1818(b), and expressly does not form, and may not
be construed to form, a contract binding on the Comptroller or the United
States.

 

(10)  The OCC issued a Consent Order to the Bank on September 24, 2009,
AA-EC-09-64 (“2009 Order”). This Order replaces the 2009 Order in its entirety
and, therefore, the 2009 Order is hereby terminated. Provided however, no
provision in this Order shall bar or otherwise limit any enforcement action the
OCC may choose to initiate, in its discretion, against the Bank or its
institution-affiliated parties (“IAPs”) for any failure to comply with the 2009
Order while it was effective.

 

(11)  All reports or plans which the Bank or Board has agreed to submit to the
Director pursuant to this Order shall be forwarded, by overnight mail, or via
email, to the following:

 

Director for Special Supervision with a copy to: Comptroller of the Currency
Cleveland/Detroit Field Office 400 7th Street, SW Comptroller of the Currency
Suite 3E-218, MS 8E-12 200 Public Square, Suite 1610 Washington, DC 20219
Cleveland, OH 44114-2241

 

The terms of this Order, including this paragraph, are not subject to amendment
or modification by any extraneous expression, prior agreements or prior
arrangements between the parties, whether oral or written.

 

IT IS SO ORDERED, this thirty-first day of October, 2013.

 

/s/Michael R. Brickman   Michael R. Brickman   Director for Special Supervision
 

 

28

 

 

UNITED STATES OF AMERICA 

DEPARTMENT OF THE TREASURY 

COMPTROLLER OF THE CURRENCY

 

In the Matter of:

First National Bank in Howell

Howell, Michigan

)

)

)

AA-EC-2013-83

 

STIPULATION AND CONSENT TO THE ISSUANCE OF A CONSENT ORDER

 

WHEREAS, the Comptroller of the Currency of the United States of America
(“Comptroller”) intends to initiate cease and desist proceedings against First
National Bank in Howell, Howell, Michigan (“Bank”) pursuant to 12 U.S.C. §
1818(b) through the issuance of a Notice of Charges, for unsafe or unsound
banking practices relating to strategic planning, capital levels, management
oversight, credit risk management, for violations of law and regulation, and for
failure to comply with the September 24, 2009 Consent Order;

 

WHEREAS, the Bank, in the interest of compliance and cooperation, and without
admitting or denying any wrongdoing, consents to the issuance of a Consent
Order, dated October 31, 2013 (“Order”);

 

NOW THEREFORE, in consideration of the above premises, the Comptroller, through
his authorized representative, and the Bank, through its duly elected and acting
Board of Directors, hereby stipulate and agree to the following:

 

1

 

 

ARTICLE I

 

JURISDICTION

 

(1)  The Bank is a national banking association chartered and examined by the
Comptroller pursuant to the National Bank Act of 1864, as amended, 12 U.S.C. § 1
et seq.

 

(2)  The Comptroller is “the appropriate Federal banking agency” regarding the
Bank pursuant to 12 U.S.C. §§ 1813(q) and 1818(b).

 

(3)  The Bank is an “insured depository institution” within the meaning of 12
U.S.C.

 

§ 1818(b)(1).

 

ARTICLE II

 

AGREEMENT

 

(1)  The Bank agrees that said Order shall be deemed an “order issued with the
consent of the depository institution” as defined in 12 U.S.C. § 1818(h)(2), and
consents and agrees that said Order shall become effective upon its issuance and
shall be fully enforceable by the Comptroller under the provisions of 12 U.S.C.
§ 1818(i). Notwithstanding the absence of mutuality of obligation, or of
consideration, or of a contract, the Comptroller may enforce any of the
commitments or obligations herein undertaken by the Bank under his supervisory
powers, including 12 U.S.C. § 1818(i), and not as a matter of contract law. The
Bank expressly acknowledges that neither the Bank nor the Comptroller has any
intention to enter into a contract.

 

(2)  The Bank also expressly acknowledges that no officer or employee of the
Comptroller has statutory or other authority to bind the United States, the U.S.
Department of the Treasury, the Comptroller, or any other federal bank
regulatory agency or entity, or an officer or employee of any of those entities
to a contract affecting the Comptroller’s exercise of his supervisory
responsibilities.

 

2

 

 

ARTICLE III

 

WAIVERS

 

(1)  The Bank, by signing this Stipulation and Consent, hereby waives:

 

(a)the issuance of a Notice of Charges pursuant to 12 U.S.C. § 1818(b);

 

(b)any and all procedural rights available in connection with the issuance of
the Order;

 

(c)all rights to a hearing and a final agency decision pursuant to 12 U.S.C. §
1818(i), 12 C.F.R. Part 19;

 

(d)all rights to seek any type of administrative or judicial review of the
Order; and

 

(e)any and all rights to challenge or contest the validity of the Order.

 

ARTICLE IV

 

OTHER ACTIONS

 

(1)  The Bank agrees that the provisions of this Stipulation and Consent shall
not inhibit, estop, bar, or otherwise prevent the Comptroller from taking any
other action affecting the Bank if, at any time, the Comptroller deems it
appropriate to do so to fulfill the responsibilities placed upon him by the
several laws of the United States of America.

 

3

 

 

IN TESTIMONY WHEREOF, the undersigned, authorized by the Comptroller as his
representative, has hereunto set his hand on behalf of the Comptroller.

 

/s/Michael R. Brickman   October 31, 2013 Michael R. Brickman   Date Director  
  Special Supervision Division    

 

4

 

 

IN TESTIMONY WHEREOF, the undersigned, as the duly elected and acting Board of

 

Directors of the Bank, have hereunto set their hands on behalf of the Bank.

 

/s/Timothy Corrigan   October 31, 2013 Timothy Corrigan   Date       /s/Stanley
Dickson, Jr.   October 31, 2013 Stanley Dickson, Jr.   Date       /s/Ronald Long
  October 31, 2013 Ronald Long   Date       /s/Philip Utter   October 31, 2013
Philip Utter   Date       /s/R. Michael Yost   October 31, 2013 R. Michael Yost
  Date

 

5