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FDIC Enforcement Decisions and Orders

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{{11-30-92 p.C-359}}
   [10,072] In the Matter of Attleboro Pawtucket Savings Bank, Attleboro, Massachusetts, Docket No. FDIC-90-90b (5-16-90).

   Bank to cease and desist from practices such as operating with excessive volume of adversely classified assets, with inadequate surplus and reserves for the kind and quality of assets, with inadequate allowance for loan and lease losses for the volume, kind and quality of loans held, with inadequate loan documentation, and with inadequate business plan; failing to submit Reports of Condition and Income; engaging in management policies and practices detrimental to Bank and unacceptable lending and lax collection practices; operating with a Board of Trustees which has failed to provide adequate supervision and direction over the affairs of Bank; and violating federal and state laws. (This order was terminated by order of the FDIC dated 9-11-92; see15,520.)

   [.1] Management—Qualifications—Compliance
   [.2] Assets—Adversely Classified—Reduce
   [.3] Capital—Capital Structure—Written Plan
   [.4] Capital-Increase—Methods
   [.5] Loan Loss Reserve—Adequacy—Review
   [.6] Loans—Risk Position—Minimum Requirements
   [.7] Assets—Adversely Classified—Reduce
   [.8] Loan Policy—Minimum Requirements—Review
   [.9] Investment Policy—Minimum Requirements—Review
   [.10] Technical Exceptions—Construction and Condominium Development Loans—Correct/Reduce
   [.11] Violations of Law—Correct—Compliance
   [.12] Strategic Plan—Minimum Requirements—Review
   [.13] Bank Operations—Internal Routine and Controls—Correct Deficiencies
   [.14] Compliance—Progress Reports—Frequency

{{11-30-92 p.C-360}}
In the Matter of

ATTLEBORO PAWTUCKET
SAVINGS BANK

ATTLEBORO, MASSACHUSETTS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Attleboro Pawtucket Savings Bank, Attleboro, Massachusetts ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or 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 alleged charges under section 8(b)(1) of the Federal Deposit Insurance 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 May 8, 1990, 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 trustees, 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) failure of the Board of Trustees to provide adequate supervision and direction over the affairs of the Bank;
   (b) operating with an excessive volume of adversely classified assets;
   (c) engaging in unacceptable lending and lax collection practices, including maintaining an excessive volume of adversely classified loans;
   (d) operating with inadequate surplus and reserves for the kind and quality of assets held;
   (e) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   (f) engaging in management policies and practices which are detrimental to the Bank;
   (g) operating with deficient or inadequate loan documentation, including but not limited to current financial statements, property appraisals, title searches or legal opinions, and cash flow and/or operating information;
   (h) operating without an adequate business plan and adequate policy directives;
   (i) engaging in violations of Massachusetts General Laws, Chapter 167E, Section 2(B), Paragraphs 2, 5, 7, and 13, Section 6, Paragraphs 2 and 5-b and Sections 332.1 and 325.3(a) of the FDIC Rules and Regulations; and
   (j) failure to properly account for transactions, inclusive of Reports of Condition and Income submission.
   IT IS FURTHER ORDERED, that the Bank, its trustees, 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) No more than 120 days from the effective date of this ORDER, the Bank shall have, and thereafter continue to retain, management acceptable to the Regional Director of the FDIC's Boston Regional Office ("Regional Director") and the Commissioner of Banks of the Commonwealth of Massachusetts ("Commissioner"). Such management shall include the retention of qualified individuals to serve as chief executive officer (CEO), and Chief Operating Officer (COO). The CEO and COO shall be given stated written authority by the Bank's board of trustees, including responsibility for implementing and maintaining lending, investment and operating policies in accord with sound banking practices. The acceptability of management shall be assessed on its conduct with respect to: (i) compliance with the requirements of this ORDER, (ii) operation of the Bank in a safe and sound manner, (iii) compliance with applicable laws and regulations, and (iv) maintenance of all aspects of the Bank in a safe and sound condition, including asset quality, {{4-1-90 p.C-361}}capital adequacy, earnings, management effectiveness, and liquidity. As used herein, "maintenance" includes improvement in quality if necessary to comply with this requirement.
   (b) In order to have acceptable management, the board of trustees in no more than 60 days from the effective date of this ORDER, assures that a written analysis and assessment of the Bank's management and staffing needs ("management plan") will be developed, 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 Bank Officer (Vice President and above) to determine whether these individuals possess 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, which the board of trustees determines are necessary to fill Bank officer or staff member positions consistent with the board's analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
   (c) The written management plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days from the receipt of any comment from the Regional Director and the Commissioner, and after consideration of such comment, the board of trustees shall approve the written management plan and/or any subsequent modification thereto which approval shall be recorded in the minutes of the board of trustees. Thereafter, the Bank, its trustees, officers and employees shall implement and follow the written management plan and/or any subsequent modification thereto.
   (d)(i) The written management plan shall also include the requirement that the board of trustees of the Bank, or a committee thereof consisting of not less than five (5) individuals who are independent with respect to the Bank, provide direct supervision over lending policies, investment policies, and operating policies of the Bank sufficient to ensure that the Bank complies with the provisions of this ORDER.
       (ii) For purposes of this ORDER, an individual who is "independent with respect to the Bank" shall be any individual (1) who is not an officer of the Bank or any of its affiliated organizations (2) who is not related by blood, marriage or common financial interest to an officer of the Bank and (3) who is not indebted to the Bank, directly or indirectly (including the indebtedness of any entity in which the individual has a substantial financial interest), in an amount exceeding five (5) percent of the Bank's total equity capital and allowance for loan and lease losses.
   (e) Effective the date of this ORDER, the Bank's board of trustees shall meet at least monthly. A proposed agenda and related committee and other reports shall be prepared and delivered five days in advance of a meeting and the board shall follow a detailed written agenda at each meeting, which shall include consideration of actions of any committees and related reports. Nothing in the foregoing sentence shall preclude the board from considering matters other than those contained in the agenda. Detailed written minutes of all board meetings shall be maintained and recorded on a timely basis.

   [.2] 2. No more than 10 days from the effective date of this ORDER, the Bank shall eliminate from its books and the books of its consolidated subsidiary Firestone Financial Corp., by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss". In addition, a specific reserve will be established against 50% of all assets or portions of assets classified "Doubtful" in the August 18, 1989 Report of Examination, which have not been previously collected, charged off, or otherwise eliminated by other proper entries. Consistent with prevailing requirements of the Instructions for the FDIC Reports of Con- {{4-1-90 p.C-362}}dition and Income, these eliminations should be made through appropriate loss reserve charges and bad debt provisions for loan classifications, reversal of income for designated uncollectible accrued interest receivable, and via direct write-downs to operating expense for other real estate holdings (ORE) and other asset classifications such as investments in joint ventures and unconsolidated subsidiaries. Reduction of these assets through use of proceeds of loans made by the Bank or Firestone Financial Corporation does not constitute collection for the purpose of this paragraph.

   [.3] 3. (a) The bank shall operate with a capital structure sufficient in relation to the composition and quality of its assets and funding 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 Regional Director and Commissioner for approval within 90 days of the effective date of this ORDER. The Capital Plan should address both internal and external sources of capital augmentation, including capital infusions, retention of earnings, restriction of asset growth, and asset sales to produce a ratio of total capital to total assets of at least eight percent (8%), with stated timetables in which to attain this goal. For purposes of this ORDER, the terms "total capital" and "total assets" are as defined in part 325 of the FDIC Rules and Regulations.

   [.4] (b) Any increase in capital necessary to meet the requirements of Paragraph 3 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, 209 C.M.R. 33.00 et seq; 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 (other than through the payment of loans with the proceeds of other loans by the Bank or Firestone Financial Corporation) without loss or liability to the Bank; or
       (v) any other means acceptable to the Regional Director; or
       (vi) any combination of the above means.
   (c) If all or part of the increase in total capital required by Paragraph 3 of this ORDER is accomplished by the sale of new securities, the Bank's Board of Trustees 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 should 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 the event not less than 20 days prior to the dissemination of such materials, the materials issued 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 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 convertability factor, shall be presented to the Regional Director and the Commissioner for prior approval.
   (e) In complying with the provisions of paragraph 3 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank securities written notice of any planned or existing development or other changes which are materially different from information reflected in any offering materials used in connection with the sale of the Bank's securities. The written notice required by this paragraph shall be furnished within 10 calendar days from the date such material development or change was planned or occurred, whichever is earlier, to every purchaser and/or subscriber of Bank securities who received or was tendered the information contained in the Bank's original offering materials.

   [.5] 4. Within 30 days of the effective date of this ORDER and after complying with Paragraph 2 of this ORDER and if not previously provided, the Bank's board of trustees shall increase the general valuation {{4-1-90 p.C-363}}reserve for loans by an additional $15,000,000 at a minimum (consolidated bank entity) and thereafter require that the reserves (Bank and Firestone Financial Corp.) be maintained at an adequate level by periodic adjustments to operating revenue. Within 60 days of the effective date of this ORDER, the Bank's board of trustees assures that a comprehensive policy for determining the adequacy of valuation reserve(s) will be established. Thereafter, on a quarterly basis, the adequacy of the reserve in relation to the loss potential in the loan portfolio(s) will be reviewed by the board of trustees and adjustments to the reserve(s) will be made accordingly. Details of these reviews will be included in the minutes of the board of trustees. Within 90 days policies must be developed for the review of other real estate holdings, joint ventures positions, and investment in both consolidated and unconsolidated subsidiaries.

   [.6] 5. (a) Within 60 days from the effective date of this ORDER, the board of trustees assures that a written plan of action will be developed to lessen the Bank's risk position in each line of credit, real estate owned parcel or joint venture property aggregating $1,000,000 or more which was classified "Substandard" or "Doubtful" as of the August 18, 1989 Report of Examination. In developing such plan, the Bank shall, at a minimum:

       (i) review the financial position of each such borrower or real estate venture including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each such credit, real estate owned or real estate venture, to include physical reinspection or potential reappraisal, including possible actions to improve the Bank's collateral position.
Based on 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 and 12 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 trustees for review and notation in the board minutes. As used in this paragraph 5, "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.
   (b) The written plan of action described by paragraph 5(a) and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director and Commissioner, the board of trustees shall approve the written plan of action, which approval shall be recorded in the minutes of the board of trustees. Thereafter, the Bank, its trustees, officers and employees shall follow the written plan of action and/or any subsequent modification.

   [.7] 6. (a) Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has 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 trustees 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 5 of this ORDER as to such borrower, and (3) approves such advance. A written record of the board of trustees' determination and approval of any advance under the terms of this paragraph 6 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the board of trustees. The requirements of this paragraph 6 do not prohibit the Bank from renewing any credit already extended to the borrower.
   (b) Effective the date of this Order, the Bank shall not accrue interest on any loan that is, or becomes, 90 days or more delinquent as to principal or interest, unless the loan is both well secured and in the process of collection; "well secured" and "in the process of collection" shall have the same meaning as those terms have in the prevailing Instructions for the Reports of Condition and Income. 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.

   [.8] 7. (a) No more than 90 days from the effective date of this ORDER, the Bank {{4-1-90 p.C-364}}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 August 18, 1989 Report of Examination and be in a form acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations. A formal loan policy applicable to Firestone Financial Corporation shall be developed and approved by its board within ninety (90) days of the effective date of this ORDER.
   (b) The Bank's loan policy and practices required by this paragraph, at a minimum, shall also include the following:

       (i) provisions for reduction in the proportion of loans and loan related funding to a more reasonable percentage of total assets, including submission of a specific plan of reduction to the Regional Director and Commissioner;
       (ii) limitations on joint venture undertakings and 100% financing of real estate construction/condominium loans;
       (iii) the responsibility of the board of trustees and its designated subcommittee in the review, ratification and loan approval process;
       (iv) adoption and utilization of appraisal practices consistent with regulatory inter-agency appraisal guidelines; and
       (v) enhancement of practices for identifying, supervising and collecting problem loans.

   [.9] 8. No more than 30 days from the effective date of this ORDER, the Bank shall revise its written investment policy to include the development of specific guidelines for equity securities holdings, covered call option programs, and securities lending activities. Parameters for discretionary authority granted the Bank's investment advisory consultant should be properly supported in writing. The board of trustees shall approve the written investment policy and any subsequent modification thereto shall be recorded in the minutes of the board.

   [.10] 9. (a) No more than 120 days from the effective date of this ORDER, the Bank shall endeavor to correct the technical exceptions on loans noted on pages 2-d of the FDIC's Report of Examination of the Bank as of August 18, 1989.
   (b) No more than 120 days from the effective date of this ORDER, the Bank shall formulate and implement a plan to reduce its large commitment to the construction industry and to condominium development in particular as noted on page 1-9 of the FDIC's Report of Examination of the Bank as of August 18, 1989.
   (c) No more than 60 days from the effective date of this ORDER, the Bank shall correct the cited deficiencies in the loans listed for "Special Mention" on page 2-b of the FDIC's Report of Examination of the Bank as of August 18, 1989.

   [.11] 10. The Bank shall take all steps necessary, consistent with sound banking practices, to correct all violations of law, rules, and regulations committed by the Bank as described on pages 6-a of the FDIC's Report of Examination of the Bank as of August 18, 1989.

   [.12] 11. The Bank shall submit to the Regional Director and the Commissioner, within 90 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, volatility and cost of liabilities, as well as general staffing levels, to accomplish the designated goals. Emphasis on budgetary considerations which may help alleviate the effects of present earnings deficiencies, supplement operating income, and foster long term goals and objectives should also be formulated.

   [.13] 12. The Bank shall, within 90 days of the effective date of this ORDER, correct all operating deficiencies in internal routine and controls as set forth in the August 18, 1989 Report of Examination.

   [.14] 13. 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 results thereof every 90 days, beginning 90 days from the effective date of the ORDER. In addition, the Bank shall furnish such reports on request of either the Regional Director or the Commissioner. All progress reports and other written responses to this ORDER shall be reviewed by the board of {{4-1-90 p.C-365}}trustees of the Bank and made a part of the minutes of the board meeting.
   14. This ORDER shall become effective 10 days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank, its trustees, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank.
   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 16th day of May, 1990.

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