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FDIC Enforcement Decisions and Orders

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   [10,034] In the Matter of Eliot Savings Bank, Boston, Massachusetts, Docket No. FDIC-89-238b (12-19-89).

   Bank to cease and desist from practices such as operating with an excessive volume of adversely classified assets; engaging in hazardous lending; engaging in speculative real estate ventures and investing in subinvestment quality securities; operating with inadequate capital for the kind and quality of assets held, with an inadequate loan valuation reserve, with inadequate levels of liquidity in relation to the level of deposits and borrowings, and with an inadequate business plan and policy directives; failing to properly account for transactions; and violating applicable federal and state law. (This order was terminated by order of the FDIC dated 11-21-90; see ¶ 15,191.)

   [.1] Management—Qualifications—Compliance
   [.2] Assets—Adversely Classified—Reduce
   [.3] Primary Capital—Increase—Methods
   [.4] Loan Loss Reserve—Adequacy—Review
   [.5] Loans—Extension of Credit—Curtail
   [.6] Investments—Subinvestment Quality Prohibited—Exception
   [.7] Loan Policy—Minimum Requirements—Review
   [.8] Loans—Residential Building Loans—Reduce
   [.9] Technical Exceptions—Eliminate and/or Correct
{{4-1-90 p.C-171}}
   [.10] Strategic Plan—Minimum Requirements—Review
   [.11] Investment and Funds Management—Minimum Requirements—Review
   [.12] Shareholders—Dividends—Approval
   [.13] Violations of Law—Correct—Compliance
   [.14] Brokered Deposits—Report—Review
   [.15] Operating Deficiencies—Internal Routine and Controls—Correct
   [.16] Compliance—Progress Reports—Frequency
   [.17] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

ELIOT SAVINGS BANK
BOSTON, MASSACHUSETTS

(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Eliot Savings Bank, Boston, Massachusetts, ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe and unsound banking practices and violations of law and/or regulations alleged to have been committed by the Bank and of its right to a hearing on such charges under section 8(b)(1) of the Federal Deposit Insurance Act, 12 U.S.C. section 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 December 12, 1989, whereby solely for the purpose of this proceeding and without admitting or denying any unsafe or unsound banking practices or violations of law and/or regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws 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, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe and unsound banking practices and violations of laws and regulations:
   (a) operating with an excessive volume of adversely classified assets;
   (b) engaging in hazardous lending including maintaining an excessive volume of adversely classified loans;
   (c) engaging in speculative real estate ventures and investing in subinvestment quality securities, including maintaining an excessive volume of adversely classified assets in these categories;
   (d) operating without adequate capital for the kind and quality of assets held;
   (e) operating with an inadequate loan valuation reserve;
   (f) operating the bank with inadequate levels of liquidity in relation to the level of deposits of $100,000 or more and borrowings;
   (g) operating with an inadequate business plan and policy directives;
   (h) engaging in violations of applicable laws and regulations: specifically, Massachusetts General Laws, Chapter 167E, section 2.B., paragraphs 5 and 13; section 6, subsection 2; section 11 paragraphs (a) and (b); and section 215.4(b) of Federal Reserve Regulation O, 12 C.F.R. section 215.4(b); and
   (i) failing to properly account for transactions.
   IT IS FURTHER ORDERED, that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, take affirmative action as follows:

   [.1] 1. (a) Within ninety (90) days of the effective date of this ORDER, the Bank shall have and thereafter continue to retain qualified management. The acceptability of management shall be assessed on its conduct with respect to: (i) compliance with the requirements of this ORDER, (ii) actions taken to operate the Bank in a safe and
{{4-1-90 p.C-172}}sound manner, (iii) compliance with applicable laws and regulations, and (iv) formulation and implementation of plans and policies directed at restoring all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity. As used in this paragraph, "maintenance" includes improvement in quality if necessary to comply with this requirement.
   (b) During the life of this ORDER, the Bank shall give prior notice to the Regional Director of the FDIC's Boston Regional Office ("Regional Director") and the Commissioner of Banks of the Commonwealth of Massachusetts ("Commissioner"), in writing, of any contemplated changes in senior management (that is, any director or any officer at or above the level of vice president) or the Board of Directors. The notification must include the names and background of any individual assuming the new position.
   (c) The Board of Directors shall provide adequate supervision and direction over the affairs of the Bank.

   [.2] 2. Within ten (10) days of the effective date of this ORDER, the Bank: (a) shall eliminate from its books, by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss" in the May 19, 1989 Report of Examination; and (b) shall either (i) eliminate from its books by charge-off, collection, or other proper entries, or (ii) provide a specific allowance for loan losses by an amount equal to fifty (50.0) percent of, those assets or portions thereof classified "Doubtful" as of May 19, 1989, which have not been previously collected, charged off, or otherwise eliminated. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection or elimination for the purpose of this paragraph.
   3. (a) Within seventy-five (75) days of the effective date of this ORDER, the Board of Directors shall develop a written plan of action to lessen the Bank's risk position in each line of credit, real estate owned, or subinvestment quality security of $1,000,000 or more of which any portion was classified "Substandard" or "Doubtful" in the May 19, 1989 Report of Examination. In developing such plan, the Bank shall, at a minimum:

       (i) review the financial position of each such borrower, real estate venture or other investment, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each credit, real estate venture, or other investment to include reinspection or potential reappraisal, including possible actions to improve the Bank's collateral or investment position.
Based upon such review and evaluation, the written plan of action shall: (a) establish target dollar levels to which the Bank shall reduce the aggregate dollar volume of "Substandard" or "Doubtful" classifications within 6, 12, and 18 months from the effective date of this ORDER; and (b) provide for the submission of written monthly progress reports to the Bank's Board of Directors for review and notation in the board minutes. As used in this Paragraph, "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 Commonwealth of Massachusetts Department of Banking. Payment of loans with the proceeds of other loans made by the Bank will not constitute "reduction" or "collection" for purposes of this ORDER, provided, however, that the foregoing shall not apply to loans made by the Bank in compliance with the terms of the lending policy referred to in paragraph 7(a) hereof to finance bona fide purchases of properties previously mortgaged to the Bank by third parties not related to or affiliated with the selling borrower.
   (b) The written plan of action described in paragraph 3(a) and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than thirty (30) days after such submission, the Board of Directors shall approve the written plan of action, or modification, taking into account any regulatory comments, which approval shall be recorded in the minutes of the Board of Directors. Thereafter, the Bank, its directors, officers and employees shall follow the written plan of action and any subsequent modification thereto.

   [.3] 4. (a) The Bank shall take all reasonable and appropriate action to bring the Bank's capital to a sufficient level and thereafter to operate within a capital structure sufficient in relation to the composition and quality of its assets and funding {{4-1-90 p.C-173}}liabilities and in accordance with Part 325 of the FDIC Rules and Regulations. Toward this end, the Bank will develop a Capital Plan which will be submitted to the Commissioner and the Regional Director for approval within sixty (60) days of the effective date of this ORDER, and within 240 days from the effective date of this ORDER, the Bank shall begin to implement such plan, and thereafter shall complete implementation of such plan. The Capital Plan shall address both internal and external sources of capital augmentation, including capital infusions, retention of earnings, restriction of asset growth, and asset sales to produce an adjusted primary capital ratio of at least eight (8.0) percent, with stated timetables in which to attain this goal. For the purposes of this ORDER, the term "adjusted primary capital" is defined in Part 325 of the FDIC Rules and Regulations.
   (b) Any increase in capital necessary to meet the requirements of Paragraph 4 of this ORDER may be accomplished by the following:

       (i) the sale of common stock and/or perpetual preferred stock, subject to applicable laws and regulations, including but not limited to Massachusetts General Laws, Chapter 172; or
       (ii) the issuance of subordinated debt; or
       (iii) the collection of assets previously charged off; or
       (iv) the reduction of the "Loss" assets specified in Paragraph 2 of this ORDER without loss or liability to the Bank; or
       (v) any other means acceptable to the Regional Director and the Commissioner; or
       (vi) any combination of the above means.
   (c) If all or part of any increase in capital required by Paragraph 4(a) of this ORDER is to be accomplished by the sale of new securities, the Bank's Board of Directors shall forthwith take all necessary steps to adopt and implement a plan for the sale of such securities. Should the implementation of the plan involve a public distribution of the Bank's securities, the Bank shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with state and Federal securities laws. Prior to the sale of the securities, and in any event, not less than twenty (20) days prior to the dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429, for review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (d) If all or any part of the increase in capital is provided by the sale of preferred stock, then all terms and conditions of the issue, including but not limited to those terms and conditions relative to interest rate and the convertibility factor, shall be presented to the Regional Director and the Commissioner for approval.
   (e) In complying with the provisions of Paragraph 4 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities written notice of any planned or existing development or other changes which are materially different from information reflected in any offering materials used in connection with the sale of the Bank's securities and which occur before completion of the purchase. The written notice required by this paragraph shall be furnished within ten (10) days of the date such material development or change was planned or occurred, whichever is earlier, to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.

   [.4] 5. Within thirty (30) days of the effective date of this ORDER and after complying with Paragraph 2 of this ORDER, the Bank's Board of Directors shall increase the general valuation reserve for loans by $5,000,000 over the level existing at June 30, 1989, at a minimum, and thereafter require that the reserve be maintained at an adequate level by periodic charges to operating revenue. Within sixty (60) days of the effective date of this ORDER, the Bank's Board of Directors shall establish a comprehensive policy for determining the adequacy of the valuation reserve. For the purpose of this determination, the adequacy of the reserve shall be determined after the charge-off of all loans classified "Loss". The policy shall provide for a review of the {{4-1-90 p.C-174}}reserve at least once each calendar quarter. The review should focus on the results of the Bank's 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, and present and prospective economic conditions. Review of other real estate and exposure therein shall be undertaken along the same lines as the aforementioned loan portfolio review. The minutes of the Board of Directors' meetings at which such review is undertaken shall indicate the result of the review. Said review should be completed at least ten (10) days after the end of each quarter in order that any loss provisions determined to be appropriate by the Board of Directors with respect to the valuation reserve may be properly reported in the quarterly Reports of Condition and Income.

   [.5] 6. (a) The Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any individual or entity who or which has a loan or other extension of credit from the Bank (or which has issued any debt security held by the Bank) that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected, unless (i) the Bank is obligated to make the advance by a binding, enforceable contract that is in force at the date of this Order or (ii) a majority of the Bank's Board of Directors first (1) determines that such advance is in the best interest of the Bank, (2) determines that the Bank has satisfied the requirements set out in Paragraph 3 of this ORDER as to such individual or entity, and (3) gives approval for such advance individually or by approving a schedule or project budget with which the advance is consistent. A written record of the Board of Directors' determination and approval of any advance shall be maintained in the credit file of the affected borrower(s) or issuer(s) as well as in the minutes of the Board of Directors.

   [.6] (b) The Bank shall not invest, directly or indirectly, in any security of any issuer of subinvestment quality equity securities in which the Bank has invested, where any portion of such security has been charged off or classified, in whole or in part, "Loss". "Doubtful", or "Substandard", unless a majority of the Bank's Board of Directors first (1) determines that such an investment is in the best interest of the Bank, (2) determines that the Bank has satisfied the requirements set out in Paragraph 3 of this ORDER as to such entity, and (3) gives approval for such investment. A written record of the Board of Directors' determination and approval of any investment shall be maintained in the credit file of the affected issuer(s) as well as in the minutes of the Board of Directors.

   [.7] 7. (a) Following the effective date of this ORDER, the Bank shall operate pursuant to a written lending policy which provides effective guidance and control over the Bank's lending function and promotes qualitative enhancement, minimization of risk, asset diversification, and liquidity considerations. Such policy and its implementation shall address the loan underwriting and administrative weaknesses detailed in the May 19, 1989 Report of Examination and be in substantially the form presented to the Regional Director and Commissioner on November 6, 1989.
   (b) The Bank's loan policy and practices required by this paragraph, at a minimum, shall include the following:

       (i) provisions for reduction in the percentage of loans and loan related asset funding to a more reasonable proportion, including submission of a specific plan of reduction to the Regional Director and Commissioner;
       (ii) a provision establishing a limit on aggregate extensions of credit to a maximum level of $5,000,000 per borrower, for all new credit relationships;
       (iii) provisions prohibiting new joint ventures/equity participations, or investment in subinvestment quality securities;
       (iv) provisions which define credit criteria and limits on proposed real estate construction and/or rehabilitation-type financing and condominium loans, including the requirement that such borrowers will be required to inject sufficient investment capital to bring the proposed loan to appraised value ratio to 80% or less;
       (v) provisions which promote loan diversification. Alternate funding avenues may include residential real estate and consumer loans.

   [.8] 8. (a) Within sixty (60) days of the effective date of this ORDER, the Bank shall formulate and begin to implement, and thereafter shall complete implementation of, a plan to substantially reduce its industry concentration in residential build- {{4-1-90 p.C-175}}ing loans and to reduce each individual borrower asset concentration scheduled on pages 2-b in the Report of Examination of the Bank as of May 19, 1989 to less than twenty-five (25.0) percent of total capital.

   [.9] (b) Within forty-five (45) days of the effective date of this ORDER, the Bank shall develop and begin to implement, and thereafter shall complete implementation of, a program for correcting the technical exceptions detailed under "Assets Listed for Technical Exception" on pages 2-e in the May 19, 1989 Report of Examination.

   [.10] 9. The Bank shall submit to the Commissioner and the Regional Director, within sixty (60) days of the effective date of this ORDER, a strategic plan that will outline the goals and objectives of the Bank, including defining the types of loans and investments to be made and the sources of funds. Said plan shall consider asset quality standards and volatility and cost of liabilities, as well as general staffing levels, to accomplish the designated goals.

   [.11] 10. Within forty-five (45) days of the effective date of this ORDER, the Bank shall formulate, adopt, and thereafter strictly follow revisions to the written Investment and Funds Management Policies acceptable to the Regional Director and the Commissioner. These revisions should provide that the Bank shall take all reasonable and appropriate efforts to bring the Bank's liquidity to an acceptable level and thereafter operate the Bank with an acceptable level of liquidity. The policy shall include, but not be limited to the following:
   (a) a description of the responsibility of the Bank's Board of Directors in establishing overall investment and asset-liability management objectives and in reviewing, approving, or ratifying investment transactions and funds management activities;
   (b) provisions establishing liquidity targets and specific plans to increase the volume and percentage of temporary (short term) liquid investments to an adequate level;
   (c) objectives and strategies for lessening the reliance on brokered deposits and other volatile liabilities;
   (d) guidelines on rate sensitivity to establish acceptable levels of interest rate risk;
   (e) provisions for coordination of the Bank's loan, investment, operating budget, and profit planning policies.

   [.12] 11. As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividends unless:
   (a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
   (b) after payment of such dividends, the adjusted primary capital ratio specified in Paragraph 4 shall not be less than eight (8.0) percent and the Bank's loan valuation reserve shall be adequate as described in Paragraph 5 of this ORDER;
   (c) such declaration and payment of dividends shall be approved in advance by the Board of Directors of the Bank; and
   (d) prior to such declaration and payment of dividends, the Regional Director and Commissioner shall be given thirty (30) days advance notice.

   [.13] 12. Within forty-five (45) days of the effective date of this ORDER, the Bank shall develop and begin to implement, and thereafter shall complete implementation of, a program for correcting all violations of law which are more fully set on pages 6-1, 6-1-a, and 6-1-b of the Report of Examination of the Bank as of May 19, 1989. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.14] 13. The Bank shall continue to report to the Regional Director regarding the use of brokered deposits, as required by Section 304.6 of the FDIC's Rules and Regulations. The notification shall indicate how any such brokered deposits are to be utilized, with specific reference to the credit quality of investments/loans and the effect on the Bank's funds position and asset/liability matching. The Regional Director shall have the right to reject the Bank's plans for utilizing brokered deposits.

   [.15] 14. The Bank shall, within ninety (90) days of the effective date of this ORDER, correct all operating deficiencies in internal routine and controls as set forth in the May 19, 1989 Report of Examination.

   [.16] 15. The Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the re- {{4-1-90 p.C-176}}sults thereof within thirty (30) days after the end of each calendar quarter, beginning immediately after the effective date of this ORDER. Such quarterly reports shall include: the most recent profit and loss statement and balance sheet of the Bank and each of the Bank's subsidiaries; a status and balance report on each classified asset; and an update on each asset concentration, technical exception, and violation of law and/or regulation. All progress reports and other written responses to this ORDER shall be reviewed by the Board of Directors of the Bank and such review made part of the minutes of the board meeting.

   [.17] 16. Following the effective date of this ORDER, the Bank shall send, as part of its usual distribution of annual disclosure documents to its shareholders, a description of this ORDER in compliance with the requirements of section 12 of the Securities Exchange Act of 1934. The description shall fully describe the ORDER in all material respects. The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank.
   This ORDER has been reviewed and concurred in by the Commissioner of Banks for the Commonwealth of Massachusetts.
   This ORDER shall become effective ten (10) days from the date of its issuance.
   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 Needham, Massachusetts, this 19th day of December, 1989.

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