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FDIC Enforcement Decisions and Orders

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{{5-31-93 p.C-1094}}
   [10,264] In the Matter of The Union Savings Bank, Patchogue, New York, Docket No. FDIC-91-160b (6-14-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with management whose policies are detrimental to the Bank; operating without an adequate business plan; following hazardous lending and lax collection practices; operating with excessive volumes of adversely classified assets; operating without adequate reserve for loan losses; engaging in practices which produce inadequate operating income; operating in violation of applicable laws or regulations; and operating with concentrations of credit. (This order was terminated by orders of the FDIC dated 11-6-92 and 3-24-93; see ¶ 15,583 and ¶ 15,639.)

   [.1] Management—Qualifications—Review
   [.2] Board of Directors—Committee to Evaluate Management
   [.3] Assets—Adversely Classified—Eliminate/Reduce—Methods
   [.4] Real Estate—Investments Restricted
   [.5] Loans—Adversely Classified—Written Assessment/Program—Review
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Loans—Collection Policy—Revision Required
   [.8] Loan Loss Reserve—Establish/Maintain—Methods
   [.9] Real Estate—Appraisal Policy—Revision Required
   [.10] Loans—Accrual Policy
   [.11] Asset Portfolio—Diversification Plan Required
   [.12] Liquidity Ratio—Policy Revision Required
   [.13] Funds Management—Written Policy Required
   [.14] Budget and Earnings Forecast—Preparation Required
   [.15] Leverage Capital—Minimum Requirement
{{8-31-91 p.C-1095}}
   [.16] Violations of Law—Eliminate/Correct
   [.17] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.18] Compliance Reports—Frequency

In the Matter of

THE UNION SAVINGS BANK
PATCHOGUE, NEW YORK
(Insured State Nonmember Bank)
ORDER TO CEASE AND DE

   The Union Savings Bank, Patchogue, New York ("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 regulations alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), 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 June 12, 1991, whereby, solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe and unsound banking practices and violations of law and 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 violations of law and regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that The Union Savings Bank, Patchogue, New York, its successors, assigns, trustees, officers, employees, agents, and other "institutionaffiliated parties", as 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 regulations:

       (a) Engaging in management policies and practices which are detrimental to the Bank;
       (b) Operating the Bank without an appropriately formulated business plan, in light of the Bank's financial condition and the economic environment;
       (c) Engaging in hazardous lending and lax collection practices;
       (d) Operating the Bank with an excessive volume of adversely classified assets, assets classified "special mention", and nonperforming assets;
       (e) Failing to provide an adequate reserve for loan losses;
       (f) Operating the Bank in such a manner so as not to produce stable operating earnings;
       (g) Operating the Bank in violation of applicable State laws and regulations; and
       (h) Operating the Bank with concentrations of credit.
   IT IS FURTHER ORDERED, that the Bank, its successors, assigns, trustees, officers, employees, agents, and other institution-affiliated parties, take AFFIRMATIVE action as follows:

   [.1] 1. 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 or 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, earnings, management effectiveness, capital adequacy and liquidity.
In the case of any addition to, or replacement of, any member of the board of trustees of the Bank, or the employment or change in responsibilities of any individual to any position as a "senior executive officer", as defined by the FDIC in section {{8-31-91 p.C-1095}}303.14(a)(3) of its Rules and Regulations ("Regulations"), 12 C.F.R. § 303.14(a)(3), promulgated pursuant to section 32 of the Act, 12 U.S.C. § 1831i, the bank shall comply with section 32 of the Act and section 303.14 of the FDIC's Regulations. While this order is in effect, the Bank shall also provide a copy of the prior notification made pursuant to section 32 and section 303.14 to the Superintendent of Banks of the New York State Banking Department ("Superintendent").

   [.2] 2. (a) Within 30 days from the effective date of this ORDER, the Bank's board of trustees shall appoint a committee ("Committee") composed of not less than three non-officer trustees who are not now, and have never been, involved in the daily operations of the Bank ("Outside Trustees"), and who are acceptable to the Regional Director of the New York Regional Office of the FDIC ("Regional Director") and the Superintendent, who shall, immediately upon being appointed, undertake an in-depth analysis of the Bank's managerial requirements. This analysis shall include a review of the composition, policies, and practices of the Bank's current operating management, and consideration of whether current operating management should be changed, or the terms and conditions under which current operating management should be continued. As part of this review, the Committee shall evaluate each Bank officer, who is a vice president or higher, 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.

   (b) Within 90 days from the effective date of this ORDER, said Committee shall prepare and present to the board of trustees of the Bank a written report of its findings and recommendations. The board of trustees of the Bank shall review the Committee's report and evaluate its current operating management in light of such report, and shall take whatever action is necessary to implement its determinations. A copy of the Committee's report, as well as the board of trustees' evaluation, determinations, and implementing actions, shall be submitted to the Regional Director and the Superintendent within 120 days from the effective date of this ORDER.

   [.3] 3. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection, charge-off, or other proper entries, all assets or portions of assets classified "Loss" and 50 percent of all assets or portion of assets classified "Doubtful" by the FDIC or the New York State Banking Department ("Department") as a result of their examinations of the Bank as of July 2, 1990 and March 31, 1990, respectively, which have not been previously chargedoff or collected or eliminated by other proper entry. In addition, and so long as this ORDER remains in effect, the Bank shall, within 30 days from the receipt of any Report of Examination of the Bank from the FDIC or the Department, eliminate from its books, by collection or charge-off, or other proper entry, all assets or portions of assets classified "Loss" and 50 percent of assets or portions of assets classified "Doubtful" in said Reports.

   (b) The Bank shall reduce the remaining total of all assets classified "Doubtful" and "Substandard" by the FDIC or the Department as a result of their examinations of the Bank as of July 2, 1990 and march 31, 1990, respectively, to not more than $55,000,000 by June 30, 1992 and, subsequently, the Bank shall reduce the total of such assets to not more than $30,000,000 by June 30, 1993. In the event the Bank fails to reduce the total amount of such assets to the required amount on the applicable date, the Bank shall, within 30 days of such date, submit a written plan to the Regional Director and Superintendent for approval describing the means and timing by which the Bank shall achieve the required reduction.
   (c) The requirements of this paragraph 3 of this ORDER shall not be construed as a standard for future operations of the Bank. In addition to accomplishing the schedule of reductions prescribed in paragraph 3(b), the Bank shall eventually reduce all adversely classified assets of the Bank.
   (d) As used in this ORDER, the word "reduce" means (i) to collect, (2) to {{8-31-91 p.C-1097}}charge-off, or (3) to improve the quality of adversely classified assets sufficiently to warrant removing any adverse classification, as determined by the FDIC or the Superintendent.

   [.4] 4. (a) Immediately upon the effective date of this ORDER, the Bank shall not engage, nor shall it permit any subsidiary to engage, in any new real estate investment of any kind, including but not limited to joint venture arrangements, other than any such real estate investments as to which the Bank is subject to a legally binding commitment which is outstanding on the effective date of this ORDER. For the purpose of this paragraph 4(a), "real estate investment" shall not include any mortgage loan made upon the security of real estate other than such loans which are specifically prohibited by paragraphs 4(b) and 4(c).

   (b) The Bank shall not engage in any new acquisition, development and construction lending other than fulfilling legally binding commitments which are outstanding on the effective date of this ORDER. For purposes of this paragraph 4(b), loans for (i) owner-occupied residential construction and (ii) the renovation, enlargement or construction of owner-occupied commercial premises of existing non-delinquent borrowers secured by a first lien mortgage on such premises shall not be deemed acquisition, development or construction lending.
   (c) The Bank shall not engage in any type of cooperative conversion type of lending other than (i) fulfilling legally binding commitments which are outstanding on the effective date of this ORDER and (ii) legal, accounting and other expenditures incurred in connection with the cooperative conversion of existing rental properties in which the Bank currently has an equity interest or in connection with workout plans approved by the Board.

   [.5] 5. Within 60 days from the effective date of this ORDER, the Bank's board of trustees shall adopt and implement a written program with regard to each asset in excess of $500,000, including other real estate and joint ventures, classified by the FDIC or the Department ("classified asset"), as a result of their examinations of the Bank as of July 2, 1990 and March 31, 1990, respectively, so as to eliminate the basis of classification of each such asset. This program shall include, at a minimum, an assessment of the status of each classified asset, the proposed action to eliminate the basis of classification and the time frame for its accomplishment. Once all such programs are adopted, a copy of the program for each classified asset which equals or exceeds $500,000 shall be forwarded to the Regional Director and the Superintendent. Furthermore, while this ORDER is in effect, the Bank's board of trustees shall, within 30 days following receipt of any Report of Examination from the FDIC or the Department, adopt and implement the aforementioned written programs for any asset classified in any such Report of Examination and not classified as of July 2, 1990 or March 31, 1990, and forward copies of such programs, as provided above, to the Regional Director and the Superintendent. For the purposes of paragraphs 5, 6, and 7 of this ORDER, the term "classified asset" means any asset, or portion thereof, classified "Substandard" or "Doubtful" in any Report of Examination of the Bank by the FDIC or the Department.

   6. The Bank's board of trustees shall conduct a review of each program adopted pursuant to Paragraph 5 of this ORDER on at least a monthly basis to determine:

       (a) The state of each classified asset:
       (b) Management's adherence to each written program;
       (c) The status and effectiveness of each written program; and
       (d) The need to revise each written program and/or take other actions.
The board of trustees of the Bank shall send quarterly progress reports on the status of each such classified asset to the Regional Director and the Superintendent.

   [.6] 7. (a) Immediately upon the effective date of this ORDER, and notwithstanding any other provision of this ORDER, the Bank shall not extend, either directly or indirectly, any new or additional credit (which, for the purposes of this ORDER, shall include the granting of renewals or extensions or the capitalizing of accrued interest) to, or for the benefit of, any borrower who is obligated in any manner to the Bank on any extension of credit, or portion thereof, which has been charged off the books of the Bank (or eliminated by other appropriate entry) in {{8-31-91 p.C-1098}}whole or in part, or to any affiliate of, or related interest of, any such borrower, so long as any portion of such extension, whether or not that portion was charged off remains uncollected. However, in the case of work-outs, the Bank shall be permitted to extend any new or additional credit which may be prohibited by this paragraph provided that the bank shall have received the prior approval of the Regional Director and the Superintendent. The prohibitions of this paragraph 7(a) shall not apply to the advance of funds by the Bank for the sole purpose of maintaining or protecting the Bank's collateral for any extension of credit, up to a maximum amount of $50,000 in the aggregate for all such advances, in respect of any single extension of credit. The Bank shall provide written notification to the Regional Director and the Superintendent immediately after each such advance, including the specific reasons therefor.
   (b) Immediately upon the effective date of this ORDER, the Bank shall not, except as specifically permitted by this paragraph 7(b), extend, directly or indirectly, any new or additional credit to any borrower whose loan or other extension of credit has been adversely classified by the FDIC or the Department, or to any affiliate of, or related interest of, any such borrower ("classified borrower"), as a result of their examinations of the Bank as of July 2, 1990 and March 31, 1990, respectively, or as a result of any subsequent examination of the Bank by the FDIC or the Department, so long as the credit(s) remains classified or uncollected. This paragraph 7(b) shall not prohibit the Bank from renewing all or any part of an extension of credit to a classified borrower who is not subject to the prohibitions of paragraph 7(a) of this ORDER, after collection in cash of interest due on the entire extension of credit. The prohibitions of this paragraph 7(b) shall not apply it:

       (i) the Bank's failure to extend further credit to such borrowers would be substantially detrimental to the best interests of the Bank;
       (ii) a comparison with the written program adopted pursuant to paragraph 5 of the ORDER shows that the Bank's formal program to eliminate the basis of criticism of said classified loan is not compromised;
       (iii) prior to extending any credit, a majority of the Bank's full board of trustees approves the credit extension and certifies, in writing, the specific reasons why failure to so act would be substantially detrimental to the best interests of the Bank. A copy of the board of trustees' certification shall be maintained in the credit file of the borrower; and
       (iv) The FDIC and the Department is immediately notified in writing of the Board's certification references in subparagraph (iii), above, together with the reasons therefor.

   [.7] 8. To the extent, if any, that it has not heretofore done so, within 60 days from the effective date of this ORDER, the board of trustees of the Bank shall revise the Bank's existing collection policies to not only include consumer loan collection procedures but to also incorporate specific guidelines to follow when collecting commercial, commercial real estate, construction and development loans, as well as joint venture assets.

   [.8] 9. (a) Within 30 days from the effective date of this ORDER, the board of trustees of the Bank shall review the adequacy of the Bank's reserve for loan losses. This review shall focus particular attention upon: (i) results of the Bank's internal loan review; (ii) loan loss experience; (iii) an estimate of potential loss exposure on each significant credit; (iv) concentrations of credit in the Bank; and (v) present and prospective economic conditions.
   (b) Immediately upon completing the review required by paragraph 9(a) of this ORDER, the Bank's board of trustees shall adopt a method of computing the balance of the Bank's reserve for loan losses that gives consideration to the volume and composition of the loan portfolio not subject to criticism, as well as to the volume and composition of criticized loans, including the factors referenced in paragraph 9(a). Thereafter, the Bank's board of trustees shall, in each quarter, reevaluate the reserve for loan losses and make such additional provisions for loan losses that are necessary to maintain the reserve at an adequate level relative to the volume of risk in the Bank's loan portfolio in accor- {{8-31-91 p.C-1099}}dance with the Instructions for preparation of Reports of Condition and Income ("Call Report Instructions"). The minutes of the board of trustees of the Bank shall reflect that such reevaluation has been performed, and documentary proof of the method employed in determining the level of the reserve shall be maintained for future regulatory review.
   (c) Within 30 days from the effective date of this ORDER, the Bank shall review all Consolidated Reports of Condition and Reports of Income (collectively, the "Call Reports") filed with the FDIC on or after December 31, 1989, and shall amend said reports if necessary to properly reflect the financial condition of the Bank as of the date of each such Report. In particular, such Reports shall contain an adequate provision for loan losses and shall properly account for general valuation reserves and specific asset reserves. Reports filed after the effective date of this ORDER shall also accurately reflect the financial condition of the Bank as of the reporting date.
   (d) All increases in the valuation reserve, with the exception of recoveries credited directly to the reserve, shall be accomplished b charges to operating earnings through the provision for loan losses or other operating expenses, as appropriate.

   [.9] 10. Within 60 days from the effective date of this ORDER, the board of trustees of the Bank shall develop and implement standards for appraisal and reappraisals of real estate collateral which shall, at a minimum, include the provisions set forth in Part 323 of the FDIC's Regulations, as effective, and the FDIC's "Guidelines for Real Estate Appraisal Policies and Review Procedures," set forth in FDIC Bank Letter BL-40-87, dated December 14, 1987.

   [.10] 11. Immediately upon the effective date of this ORDER, the Bank's board of trustees shall adopt a loan accrual policy which is in conformance with Call Report Instructions and shall instruct the officers of the Bank to strictly adhere to said loan accrual policy at all times and for all types of extensions of credit. In addition, within 30 days from the effective date of this ORDER, the board of trustees of the Bank shall adopt and implement formal review procedures to ensure that provisions of the Bank's loan accrual policy are being properly followed.

   [.11] 12. (a) Within 90 days from the effective date of this ORDER, the Bank shall review and, to the extent, if any, it has not heretofore done so, revise the Bank's plan to increase the diversification of its asset portfolio ("Plan"). Specifically, the Plan shall address measures, target ratios and time frames reducing each individual concentration of credit, as specified on pages 2-b and 2-b-1 of the Report of Examination of the Bank by the FDIC as of July 2, 1990 and on supplemental pages 2 through 2(2) of the March 31, 1990 Department Report, to less than 25 percent of Tier I capital, unless a delay concerning the reduction of a specific concentration is authorized in writing and noted in the minutes of the Bank's board of trustees meeting as being necessary to protect the Bank's interests. A copy of such notation shall forthwith by submitted to the Regional Director and the Superintendent.
   (b) The Plan shall also provide for definitive limitations designed to reduce the volume of all acquisition, development and construction loans, and joint venture activities. A schedule including specific goals and time frames shall also be developed.

   [.12] 13. Within 30 days from the effective date of this ORDER, the Bank shall revise its liquidity policy to establish a minimum liquidity ratio of 20 percent.

   [.13] 14. Within 60 days from the effective date of this ORDER, the Bank's board of trustees shall revise its funds management policy to adopt and implement a detailed plan to expeditiously reduce the Bank's asset/liability repricing mismatch. The plan shall include specific rate sensitivity targets for various time horizons and a comprehensive strategy to attain those goals. For the purposes of this plan, regular and NOW savings deposits will be regarded as being wholly rate sensitive unless documentation is available to demonstrate to the satisfaction of the Regional Director and the Superintendent that a pro-rata amount has historically proven to be non-sensitive in both high and low interest rate environments. When adopted, the revised policy shall be submitted to the Regional Director and the Superintendent for review and comment.

   [.14] 15. Within 60 days from the effec- {{8-31-91 p.C-1100}}tive date of this ORDER, the Bank's board of trustees shall review and to the extent, if any, that it has not heretofore done so, revise the Bank's plan for improving and sustaining the earnings of the Bank to ensure that the plan includes, at a minimum, the following elements:

       (a) Identification of the major areas in and means by which the board will seek to improve the Bank's operating performance;
       (b) Realistic and comprehensive budgets, including projected balance sheets and year-end income statements;
       (c) A budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
       (d) A description of the operating assumptions that form the basis for major projected income and expense components.
   16. (a) The budgets and related documents required by paragraph 15, for calendar year 1991, shall be submitted to the Regional Director and the Superintendent immediately after being developed. The Bank's board of trustees shall submit to the Regional Director and the Superintendent annual budgets, as described in paragraph 15, by January 31st of each year this ORDER remains in effect.
   (b) The bank's board of trustees shall review, and revise, as necessary, its budget on at least a quarterly basis. Each such review shall be noted in the minutes of the board meeting at which the review was undertaken and a copy of any revised projections, or other written evidence of the review, shall forthwith be provided to the Regional Director and the Superintendent.

   [.15] 17. (a) While this ORDER is in effect, the minimum leverage capital requirement for the Bank pursuant to section 325.3 of the FDIC's Regulations, 56 Fed. Reg. 10154, 10162 (to be codified at 12 C.F.R. § 325.3) shall consist of a ratio of Tier 1 capital to total assets of not less than 5.5 percent.
   (b) While this ORDER is in effect, the Bank shall also submit a copy of any plan submitted to the FDIC pursuant to section 325.3(c)(3) to the Superintendent for review and approval. Upon receiving written notification from the FDIC and the Superintendent of approval of such plan, the Bank shall increase its Tier 1 capital ratio to equal or exceed said 5.5 percent in accordance with the approved plan and shall thereafter maintain its Tier 1 capital ratio at or in excess of such level while this ORDER is in effect.

   [.16] 18. To the extent, if any, that it has not heretofore done so, within 30 days from the effective date of this Order, the Bank shall submit a plan to the Superintendent for the correction of the violations of Sections 235.21(a) and 235.31(a) of the New York State Banking law and Part 88 of the General Regulations of the New York State Banking Board described on page 10 of the March 31, 1990 Department Report within the time frame specified in such plan, which time frame shall be reasonably acceptable to the Superintendent. In addition to the foregoing, the Bank shall take all steps necessary to ensure future compliance with all applicable Federal and State laws and regulations (it being understood, however, that any violation of a statutory or regulatory ceiling that results from a decrease in the Bank's assets pursuant to the Bank's strategic plan or the projected balance sheets submitted pursuant to numbered paragraph 16 above shall not be deemed a violation of law or regulation).

   [.17] 19. Within 30 days from the effective date of this ORDER, the Bank's board of trustees shall appoint a committee ("Compliance Committee") composed of not less than three non-officer trustees who are not now, and have never been, involved in the daily operations of the Bank ("Outside Trustees"), and who are acceptable to the Regional Director and the Superintendent, who shall monitor the Bank's compliance with this ORDER. Within 30 days from the effective date of this ORDER, and at monthly intervals thereafter, such Compliance Committee shall prepare and present to the Bank's board of trustees a written report of its findings, detailing the form, content, and manner of any action taken to secure compliance with this ORDER and the results thereof, and any recommendations with respect to such compliance. Such progress reports shall be included in the minutes of the Bank's board of trustees.

   [.18] 20. By the 15th day after the end of the calendar quarter following the effective date of this ORDER, and by the 15th day after the end of every calendar quarter there- {{9-30-92 p.C-1101}}after, the Bank shall furnish written progress reports to the Regional Director and the Superintendent detailing the form, content, and manner of any actions taken to secure compliance with this ORDER, and the results thereof.
   The effective date of this ORDER shall be 10 days from the date of its issuance; at which time this ORDER shall supersede the memorandum of understanding dated October 19, 1989.
   The provisions of this ORDER shall be binding upon the Bank, its successors, assigns, trustees, officers, employees, agents, and other 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.
   Date of Issuance: June 14, 1991
   Pursuant to delegated authority.

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