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FDIC Enforcement Decisions and Orders

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   [10,200] In the Matter of Somerset Savings Bank, Somerville, Massachusetts, Docket No. FDIC-91-79b (3-19-91).

   Bank to cease and desist from operating with an excessive volume of adversely classified assets; engaging in hazardous lending and lax collection practices; operating in violation of law and regulations; operating with management whose policies are detrimental to the bank; operating with inadequate loan documentation; engaging in practices which produce inadequate operating income and excessive loan losses; failing to provide adequate supervision and direction over the affairs of the bank; and paying excessive cash dividends. (This order was modified by order of the FDIC dated 11-15-93; see ¶ 15,751.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements—Review
   [.3] Board of Directors—Election—Independent Directors
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   [.4] Board of Directors—Meetings—Frequency—Written Record
   [.5] Assets—Adversely Classified—Reduce/Eliminate
   [.6] Capital—Capital Structure—Written Plan—Minimum Requirements—Review
   [.7] Allowance for Loan and Lease Losses—Increase/Maintain—Report
   [.8] Loans—Risk Position—Reduce—Written Plan
   [.9] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.10] Loans—Overdue—Accrual of Interest
   [.11] Loan Policy—Written Review Required
   [.12] Profit Plan—Written Plan—Minimum Requirements—Review
   [.13] Dividends—Restricted
   [.14] Shareholders—Disclosure—Cease and Desist Order
   [.15] Technical Exceptions—Correct
   [.16] Violations of Law—Eliminate/Correct
   [.17] Compliance—Progress Reports—Frequency

In the Matter of

SOMERSET SAVINGS BANK
SOMERVILLE, MASSACHUSETTS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Somerset Savings Bank, Somerville, 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 alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated March 12, 1991, 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, and its institution-affiliated parties, as that term is defined in section 3(u) of the Act 12, U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices and violations of law and/or regulations:

       (a) operating with an excessive volume of adversely classified assets;
       (b) engaging in hazardous lending and lax collection practices, including maintaining an excessive volume of adversely classified loans;
       (c) engaging in violations of applicable laws and regulations; specifically violations of Massachusetts General Laws Chapter 167E;
       (d) operating with management whose policies and practices are detrimental to the Bank;
       (e) operating with deficient or inadequate loan documentation, including but not limited to current financial statement, appraisals, rent rolls and cash flow and/or operating information;
       (f) engaging in practices which produce inadequate operating income and excessive loan losses;
       (g) failing to provide adequate supervision and direction over the affairs of the {{5-31-91 p.C-888}}Bank to prevent unsafe or unsound practices and violations of laws;
       (h) paying excessive cash dividends in relation to the Bank's net income and/or capital position.
   IT IS FURTHER ORDERED, that the Bank, and its institution-affiliated parties take affirmative action as follows:

   [.1] 1. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall have and retain qualified management. Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER,
       (ii) operate the Bank in a safe and sound manner,
       (iii) comply with applicable laws and regulations, and
       (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness and liquidity.
   During the life of this ORDER, the bank shall notify the Regional Director of the FDIC's Boston Regional Office ("Regional Director") and the Commissioner of Banks for the Commonwealth of Massachusetts ("Commissioner") in writing of any changes in management. The notification must include the names and background of any replacement personnel and must be provided prior to the individuals assuming the new position.

   [.2] (b) In order to have acceptable management, within sixty (60) days from the effective date of this ORDER, the Board of Directors shall cause to be developed a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:

       (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank;
       (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
       (iii) evaluation of each Bank officer and staff member, particularly senior management, 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 Directors determines are necessary to fill Bank officer or staff member positions consistent with the Board's analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
   (c) The written management plan shall be submitted to the Regional Director and the Commissioner for review and comment. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the written management plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the written management plan may be made only after giving the Regional Director and the Commissioner written notice of the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and the Commissioner within thirty (30) days from their receipt of the notice of proposed modification. No such modification shall become effective until approved by the Board of Directors, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers and employees shall implement and follow the written management plan and/or any subsequent modification thereto.
   (d) (i) The written management plan shall also include the requirement that the Board of Directors of the Bank, or a committee thereof consisting of not less than a majority of Board members who are independent with respect to the Bank, provide supervision over lending, investment and operating policies of the Bank sufficient to ensure that the {{5-31-91 p.C-889}} Bank complies with the provisions of this ORDER.

   [.3] (ii) At the next meeting of the shareholders of the Bank, and at each succeeding meeting of the shareholders at which Bank directors are to be elected, the members of the Board of Directors who are also shareholders shall nominate and support the election of candidates to the Board of Directors who are independent with respect to the Bank, in such number as is necessary to cause a majority of the Board of Directors to be and to remain independent with respect to the Bank.
   (iii) 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 and who does not own more than five (5.0) percent of the outstanding shares of the Bank, (2) who is not related by blood, marriage or common financial interest to an officer of the Bank or to any stockholder owning more than five (5.0) percent of the Bank's outstanding shares, 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 (5.0) percent of the Bank's total equity capital and allowance for loan and lease losses.

   [.4] (e) The Bank's Board of Directors shall meet at least monthly. The Board shall prepare in advance and shall follow a detailed written agenda at each meeting, which shall include consideration of actions of any committees. A chronological file of all written agendas shall be maintained. Notwithstanding the foregoing, the Board shall not be precluded 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.

   [.5] 2. Within ten (10) days from the effective date of this ORDER, the Bank: (1) shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" as of March 9, 1990; and (2) shall either (A) eliminate from its books by charge-off or collection, or (B) if the asset is an extension of credit or lease, increase its allowance for loan and lease losses by an amount equal to, fifty (50.0) percent of those assets or portions of assets classified "Doubtful" as of March 9, 1990, which have not been previously collected or charged off. 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.

   [.6] 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's Rules and Regulations, 12 C.F.R. Part 325. Within twelve (12) months from the effective date of this ORDER, the Bank shall have primary capital at or in excess of eight (8.0) percent of the Bank's total assets ("primary capital ratio") and shall subsequently continue to maintain its primary capital ratio at or in excess of such level as calculated herein while this ORDER is in effect. Toward this end, the Bank shall develop a capital plan to achieve such ratio within the indicated time frame which will be submitted to the Regional Director and the Commissioner for approval within sixty (60) days from the effective date of this ORDER. Upon approval by the Regional Director and the Commissioner, the capital plan shall be immediately implemented. The terms "primary capital" and "total assets" shall have the same meanings ascribed to them in Part 325 of he FDIC's Rules and Regulations, 12 C.F.R. Part 325.
   (b) If during the period this ORDER is in effect the ratio specified in paragraph 3(a) declines below eight (8.0) percent, the Bank, within thirty (30) days after the date on which the said ratio so declined, shall submit a written plan to the Regional Director and the Commissioner for increasing the ratio up to or in excess of eight (8.0) percent. Upon approval by the Regional Director and the Commissioner, the Bank shall immediately implement the written plan.
   (c) The written capital plan shall address both internal and external sources of capital augmentation, including capital infusion, retention of earnings, restriction of asset growth, and asset sales to produce a primary capital ratio of at least eight (8.0) percent.
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   (d) Any increase in primary capital necessary to meet the requirements of paragraphs 3(b) and 3(c) of this ORDER may be accomplished by:

       (i) the sale of common or perpetual preferred stock;
       (ii) the sale of existing shares by the Bank's shareholders to individuals who will contribute to the required increase in primary capital to the Bank;
       (iii) the direct contribution of cash by the shareholders and/or directors of the Bank;
       (iv) the collection of all or part of assets classified: (A) "Loss" as of March 9, 1990, without loss or liability to the Bank, or (B) "Doubtful" as of March 9, 1990, without loss or liability to the Bank, provided any collection on such assets shall first be applied to that portion of the asset which was not charged off pursuant to paragraph 2 of this ORDER. Reductions to loans and leases classified "Loss" and "Doubtful" shall first be credited to the Bank's allowance for loan and lease losses ("allowance") and, if the Board of Directors' review of the adequacy of the allowance required by paragraph 4 of this ORDER indicates that such allowance has a balance in excess of that required for adequacy, any such excess may be transferred to equity capital through a negative provision for loan and lease losses;
       (v) the collection in cash assets previously charged off;
       (vi) any combination of the above means; or
       (vii) any other means acceptable to the Regional Director and the Commissioner.
   (e) If all or part of the increase in total primary capital required by the Bank under paragraph 3(a) and 3(b) of this ORDER involves an offering, other than an offering deemed not to be a public securities offering pursuant to 17 C.F.R. section 230.506 or as hereafter amended, of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the 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 Section, Washington, D.C. 24029, for review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (f) In complying with the provisions of paragraph 3(e) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank stock, written notice of any planned or existing development or other change which is materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph 3(f) shall be furnished within ten (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 stock who received or was tendered the information contained in the Bank's original offering materials.
   (g) The Bank's Board of Directors shall maintain in its minutes a written record of all actions taken by the Bank to comply with the capital requirements of paragraphs 3(a) through 3(f) of this ORDER, including, at a minimum, any action to increase its primary capital by each of the methods specified in paragraphs 3(d)(i) through 3(d)(vi) of this ORDER.

   [.7] 4. (a) The Bank shall maintain an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income ("Instructions").
   (b) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the Board of Directors of the Bank shall: (1) review the adequacy of the Bank's allowance for loan and lease losses, (2) provide for an adequate allowance, and (3) accurately report the allowance in any such Report of Condition and Income. The minutes of the Board meeting at which such review is undertaken shall indicate the results of {{5-31-91 p.C-891}} the review, including any increases in the allowance, and the basis for determining the amount of allowance provided.

   [.8] 5. (a) Within ninety (90) days from the effective date of this ORDER, the Board of Directors shall cause to be developed a written plan of action to lessen the Bank's risk position with respect to each borrower who or which had outstanding principal debt owing to the Bank in excess of $250,000 which was classified "Substandard" or "Doubtful," in whole or in part, as of March 9, 1990. In developing such plan, the Bank shall, at a minimum:

       (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position. Based upon such review and evaluation, the 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 six (6) and twelve (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 Directors for review and notation in the Board minutes. Exhibit A provides the form for the progress report. 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 and the Commonwealth of Massachusetts Department of Banking. Payment of loans with the proceeds of the other loans made by the Bank will not constitute "reduction" or "collection" for purposes of this ORDER.
   (b) The written plan of action described by paragraph 5(a) shall be submitted to the Regional Director and the Commissioner for review and comment. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the written plan of action, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the written plan may be made only after giving the Regional Director and the Commissioner written notice of the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and the Commissioner within thirty (30) days from their receipt of the notice of proposed modification. No such modification shall become effective until approved by the Board of Directors, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, its officers and employees shall follow the written plan of action and/or any subsequent modification thereto.

   [.9] 6. The Bank shall not extend or renew, 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 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 5 of this ORDER as to such borrower, and (3) approves such advance. A written record of the Board of 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 Directors.

   [.10] 7. The Bank shall not accrue interest on any loan that is, or becomes, ninety (90) days or more delinquent as to principal or interest, unless the loan is both well secured and in the process of collection. For purposes of this paragraph 7, "well secured" and "in the process of collection" shall have the same meaning as those terms have in the prevailing Instructions. The Bank shall reverse on its books all previously accrued but uncollected interest on any loan that has ceased to accrue interest pursuant to this provision.

   [.11] 8. Within ten (10) days from the effective date of this ORDER, the Board shall review the Bank's written loan policy and shall record the results of such review in the Board of Directors minutes. Thereafter, the Bank, its directors, officers, and employees shall follow the written loan policy.
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   [.12] 9. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:

       (i) identification of the major areas in, and means by, which the Board of Directors will seek to improve the Bank's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (b) The written profit plan shall be submitted to the Regional Director and the Commissioner for review and comment. No sooner than thirty (30) days, but under no circumstances more than forty-five (45) days after such submission, the Board of Directors shall approve the written profit plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the written profit plan may be made only after giving the Regional Director and the Commissioner written notice of the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and the Commissioner within thirty (30) days from their receipt of the notice of proposed modification. No such modification shall become effective until approved by the Board of Directors, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification thereto.

   [.13] 10. The Bank shall not pay or declare any dividends without the prior written consent of the Regional Director and the Commissioner.

   [.14] 11. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (1) in conjunction with the Bank's next shareholder communication, and also (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Section, Washington, D.C. 20429, for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.

   [.15] 12. Within sixty (60) days from the effective date of this ORDER, the Bank shall endeavor to correct the technical exceptions on loans noted on pages 2-b - 2-b-1 of the Commonwealth's Report of Examination of the Bank as of March 9, 1990.

   [.16] 13. Within sixty (60) days from the effective date of this ORDER, the Bank shall eliminate and/or correct all remediable violations of law and regulations committed by the Bank as described on pages 6-a of the Commonwealth's Report of Examination of the Bank as of March 9, 1990.

   [.17] 14. Within thirty (30) days from the effective date of this ORDER, and, thereafter, within thirty (30) days from the end of each calendar quarter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof. In addition, the Bank shall furnish such reports on request of either the Regional Director and the Commissioner. All progress reports and other written responses to this ORDER shall be reviewed by the Board of Directors of the bank and made a part of the minutes of the Board meeting.
   This ORDER shall become effective ten (10) days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank and its institution-affiliated parties.
   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 March, 1991.

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