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FDIC Enforcement Decisions and Orders

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{{5-31-94 p.C-1743}}
   [10,402] In the Matter of FWB Bank, Rockville, Maryland, Docket No. FDIC-91-381b (12-9-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with an excessive level of poor quality assets; operating with inadequate capital; following hazardous lending and lax collection practices; operating with hazardous concentrations of credit in the real estate industry; operating so as not to produce stable operating earnings; and operating without adequate supervision of management by the board of directors. (This order was terminated by order of the FDIC dated 3-21-94; see ¶ 15,832.)

   [.1] Assets—Adversely Classified—Eliminate/Reduce
   [.2] Assets—Problem Assets—Individual Written Plans
   [.3] Assets—Problem Assets—Review of Plans
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Lending and Collection Policy—Minimum Requirements
   [.7] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.8] Dividends—Restricted
   [.9] Asset Portfolio—Diversification Required
   [.10] Real Estate Activities—Restricted
   [.11] Loan Loss Reserve—Establish/Maintain
   [.12] Budget and Earnings Forecast—Preparation Required
   [.13] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.14] Compliance Reports—Frequency

In the Matter of

FWB BANK
ROCKVILLE, MARYLAND
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   FWB Bank, Rockville, Maryland ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices alleged to have been committed by the Bank and of its right to a hearing on such 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 December 9, 1991, whereby, solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, 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. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that FWB Bank, Rockville, Maryland, its directors, officers, employees, agents, successors, as- {{5-31-94 p.C-1744}}signs, and other institution-affiliated 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:

       (a) Operating the Bank with an excessive level of poor quality assets;
       (b) Operating the Bank with a level of Tier 1 capital which is inadequate in relation to the kind and quality of its assets;
       (c) Engaging in hazardous lending and lax collection practices including, but not limited to:
         (i) Extending credit without making a thorough analysis and review of financial statements submitted in connection with such loans to ensure the adequacy and accuracy of the data provided and the ability of the loan applicant to repay the loan amount according to contractual terms;
         (ii) Extending credit without confirming and updating collateral values for real estate pledged to secure such loans;
         (iii) Extending credit to real estate developers and builders for the development of land and construction of housing units on a speculative basis without making an independent judgment of the feasibility of the project being financed and the reputation of the borrower.
       (d) Operating the Bank with an excessive concentration of loans to land developers and residential home builders, and loans for which collection is largely dependent upon a significant improvement in the local real estate market;
       (e) Operating the Bank in such a manner as to not produce stable operating earnings;
       (f) Operating the Bank without adequate supervision of operating management by the board of directors.
   IT IS FURTHER ORDERED, that the Bank, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties, take AFFIRMATIVE action as follows:

   [.1] 1. Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection or charge-off, all assets or portions of assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" by the FDIC and the Bank Commissioner of the State of Maryland ("Bank Commissioner") as a result of their joint examination of the Bank as of March 18, 1991 ("March Joint Examination"), which have not been previously charged-off or collected. In addition, and so long as this ORDER remains in effect, the Bank shall, within 30 days from receipt of any subsequent Report of Examination of the Bank from the FDIC or the Bank Commissioner, eliminate from its books, by collection or charge-off, all assets or portions of assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" in said Reports of Examination. Elimination of these assets through the use of the proceeds of loans or other extensions of credit made by the Bank does not constitute collection for the purposes of this paragraph 1.

   [.2] 2. Within 30 days from the effective date of this ORDER, the board of directors of the Bank shall adopt and implement a written program with regard to each asset equal to or in excess of $100,000 criticized by the FDIC and the Bank Commissioner as a result of their March Joint Examination, so as to eliminate the basis of criticism of each such asset. This program shall include, at a minimum, an assessment of the status of each criticized asset, the proposed action for eliminating the basis of criticism, and the time frame for its accomplishment. Once all such programs are adopted, a copy of the program for each criticized asset which equals or exceeds $100,000 shall be forwarded to the Regional Director of the New York Region of the FDIC ("Regional Director") and the Bank Commissioner. Furthermore, while this ORDER is in effect, the Bank's board of directors shall, within 30 days following receipt of any Report of Examination of the Bank from the FDIC or the Bank Commissioner, adopt and implement written programs, as specified above, for any assets criticized in said Reports and not criticized as March 18, 1991, and forward copies of such programs to the Regional Director and the Bank Commissioner. For the purposes of this ORDER, the term "criticized asset" means any asset, or portion thereof, scheduled as "Special Mention", "Substandard", or "Doubtful" in any Report of Examination of the Bank by the FDIC or the Bank Commissioner.

   [.3] 3. The Bank's board of directors shall conduct a review of each program adopted pursuant to paragraph 2 of this ORDER at least once in every two-month period ("bimonthly"), to determine:

    {{2-29-92 p.C-1745}}(a) the status of each criticized 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 shall send bimonthly progress reports on the status of each criticized asset equal to or exceeding $100,000 to the Regional Director and the Bank Commissioner.

   [.4] 4. (a) Within 360 days from the effective date of this ORDER, the Bank shall reduce to not more than 7 percent, the ratio of loans on which interest or principal is past due 30 days or more to gross loans. If such ratio exceeds 7 percent at the end of such period, a written explanation of the reason for such excess and the status of collection efforts of each such past-due loan shall be reflected in the minutes of the board of directors of the Bank and forwarded to the Regional Director and the Bank Commissioner.
   (b) Within 360 days from the effective date of this ORDER, the Bank shall reduce to not more than 4.5 percent, the ratio of nonaccrual loans to gross loans. If such ratio exceeds 4.5 percent at the end of such period, a written explanation of the reason for such excess and the status of collection efforts of each such nonaccrual loan shall be reflected in the minutes of the board of directors of the Bank and forwarded to the Regional Director and the Bank Commissioner.
   (c) Within 360 days from the effective date of this ORDER, the Bank shall reduce the remaining total of all assets classified "Doubtful" and "Substandard" by the FDIC and the Bank Commissioner as a result of their March Joint Examination, to not more than 50 percent of Tier 1 capital, and, within 540 days of the effective date of this ORDER, the Bank shall reduce the total of such assets to not more than 25 percent of Tier 1 capital.
   (d) As used in paragraph 4 of this ORDER, the word "reduce" means (1) to collect, (2) to charge off, or (3) to improve the quality of adversely classified assets sufficiently to warrant removing any adverse classification, as determined by the FDIC and the Bank Commissioner. Reduction of these assets through the use of the proceeds of loans or other extensions of credit made by the Bank does not constitute collection for the purposes of paragraphs 4(a), 4(b), and 4(c) of this ORDER.

   [.5] 5. (a) Immediately upon the effective date 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 in whole or in part, or to any affiliate or related interest of, or other person or entity associated with, any such borrower, so long as any portion of such extension of credit, whether or not that portion was charged off, remains uncollected.
   (b) Immediately upon the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any new or additional credit to, or for the benefit of, any borrower who is obligated in any manner to the Bank on any loan or extension of credit that has been adversely classified, in whole or in part, by the FDIC and the Bank Commissioner as a result of their March Joint Examination or as a result of any subsequent examination of the Bank by the FDIC or the Bank Commissioner, or to any affiliate or related interest of, or other person or entity associated with, any such borrower ("classified borrower"), so long as such loan or other extension of credit remains classified or is uncollected. This paragraph 5(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 5(a) of this ORDER, after collection in cash of interest due on the entire extension of credit. The prohibitions of this paragraph 5(b) shall not apply to any extension of credit to a classified borrower who is not subject to the prohibitions of paragraph 5(a) of this ORDER, if:

       (i) the Bank's failure to extend further credit to a classified borrower would
    {{2-29-92 p.C-1746}}be substantially detrimental to the best interests of the Bank;
       (ii) a comparison with the written program adopted pursuant to paragraph 2 of this ORDER shows that the Bank's formal program to eliminate the basis of criticism of said criticized asset is not compromised; and
       (iii) prior to extending any credit, a majority of the Bank's full board of directors approves the extension of credit 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 directors' certification shall be maintained in the credit file of the classified borrower.

   [.6] 6. Within 60 days from the effective date of this ORDER, the Bank's board of directors shall review the Bank's written loan and collection policies and adopt revisions, if necessary, to provide effective guidance and control over the lending and collection functions of the Bank. Copies of the revised policies shall be forwarded to the Regional Director and the Bank Commissioner for review. At a minimum, the policies shall include the following:
       (a) A requirement that all loans or commitments which equal or exceed $100,000 shall be reviewed by and receive the prior approval of the board of directors;
       (b) The establishment of minimum credit standards which shall include, at a minimum: (i) financial statement requirements; (ii) credit analysis requirements; (iii) loan purpose statement requirements; (iv) identification of payment sources (primary and secondary); and (v) realistic repayment plan requirements;
       (c) Limitations as to the dollar amount of loans which can be advanced in relation to the value of collateral held as security, and a description of the documentation required by the Bank for each type of secured credit;
       (d) A requirement that all real estate appraisals for properties accepted as collateral for loans comply with the provisions set forth in Part 323 of the FDIC Rules and Regulations, 12 C.F.R. Part 323;
       (e) A provision outlining specific collection procedures to be taken by the Bank ments and become delinquent for contractual interest or principal payments;
       (f) Guidelines specifying the circumstances under which loans may be renewed or have their maturity dates extended (i) without full collection of interest thereon, and (ii) by acceptance of separate notes in payment of interest, unless prohibited by paragraph 5 of this ORDER;
       (g) Guidelines specifying the circumstances under which interest reserves may be established for land, development, and construction loans, and including the maximum dollar amount of such reserves for individual loans and the maximum time period for which uncollected interest may be charged to an interest reserve;
       (h) Guidelines for the determination of loan product pricing;
       (i) Provisions specifically providing for adequate risk diversification within the Bank's asset structure, including but not limited to (i) restricting loan concentrations to one borrower, related borrowers, or other borrower affiliations or associations which evidence commonality of credit risk, to not more than 25 percent of Tier 1 capital, and (ii) restricting loan concentrations to a particular industry to not more than 100 percent of Tier 1 capital.

   [.7] 7. (a) By not later than March 31, 1992, the Bank shall increase its Tier 1 capital to not less than $4,100,000, or to an amount not less than 7 percent of its total assets, whichever is greater. Thereafter, the Bank shall maintain the ratio of its Tier 1 capital to its total assets at not less than 7 percent. For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively in subsections 325.2(m) and (n), 56 Fed. Reg. 10,154, 10,161 (1991) (to be codified at 12 C.F.R. §§ 325.2(m) and (n)). Such increase in Tier 1 capital necessary to meet and maintain the ratio required by this paragraph may be accomplished by:
       (i) the sale of securities in the form of new common stock; or
       (ii) the direct contribution of cash by the shareholders and/or directors of the Bank; or
    {{2-29-92 p.C-1747}}or alternative means acceptable to the FDIC.
   (b) If all or part of the increase in Tier 1 capital required by paragraph 7(a) of this ORDER is accomplished by the sale of new securities, the board of directors of the Bank shall forthwith adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of Bank securities (including a distribution limited only to the Bank's existing shareholders), 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 implementation of the plan, and in any event not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC. Registration and Disclosure Section, Washington, D.C. 20429, and to the Bank Commissioner for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination.
   (c) In complying with the provisions of paragraph 7(b) 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 the information reflected in any offering materials used in connection with the sale of Bank 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, and shall be furnished to every purchaser and/or subscriber of Bank securities who received or was tendered the information contained in the Bank's offering materials.

   [.8] 8. While this ORDER is in effect, the Bank shall not declare or pay either directly or indirectly any dividends, whether in cash, stock, or otherwise, on its common stock, without the prior written consent of the Regional Director and the Bank Commissioner.

   [.9] 9. Within 30 days from the effective date of this ORDER, the Bank's board of directors shall adopt a plan to increase the diversification of the Bank's asset portfolio ("Plan"). Specifically, the Plan shall address measures to be taken, target ratios to be met, and time frames for reducing the concentration of credit in loans granted for land development and residential construction financing which are detailed on pages 2-b and 2-b-1 of the joint Report of Examination of the Bank by the FDIC and the Bank Commissioner as of March 18, 1991, to less than 100 percent of Tier 1 capital within 24 months from the effective date of this ORDER.

   [.10] 10. Immediately upon the effective date of this ORDER, the Bank shall not engage in any new land development and speculative residential construction lending other than fulfilling legally binding commitments which are outstanding on the effective date of this ORDER. For the purposes of this paragraph 10, loans for owner-occupied residential construction and renovation shall not be deemed speculative residential construction lending.

   [.11] 11. (a) Within 30 days from the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's reserve for loan and lease 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 11(a) of this ORDER, the Bank's board of directors shall adopt a method of computing the balance of the Bank's reserve for loan and lease 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 but not limited to the factors referenced in paragraph 11(a). Thereafter, the Bank's board of directors shall, during the first month of each quarter, reevaluate the reserve for loan and lease losses and make such additional provi- {{2-29-92 p.C-1748}}sions for loan and lease losses that are necessary to maintain the reserve at an adequate level relative to the volume of risk in the Bank's loan portfolio. All such additional provisions for loan and lease losses shall be made in the first month of the calendar quarter in which the deficiency in the reserve is identified, but as of the end of the preceding calendar quarter, and shall be reflected in the Report of Condition and the Report of Income filed in the calendar quarter in which the deficiency is identified with respect to the preceding calendar quarter. The minutes of the board of directors 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) All increases in the reserve for loan and lease losses, with the exception of recoveries credited directly to the reserve, shall be accomplished by charges to operating earnings through the provision for loan and lease losses.

   [.12] 12. Within 30 days from the effective date of this ORDER, the Bank's board of directors 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:

       (i) Identification of the major areas in and means by which the board will seek to improve the Bank's operating performance;
       (ii) Realistic and comprehensive budgets, including projected balance sheets and year-end income statements;
       (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 major projected income and expense components.
   13. (a) The budgets and related documents required by paragraph 12, for calendar year 1992 and for subsequent years, shall be submitted to the Regional Director and the Bank Commissioner immediately after being adopted by the board, but no later than January 31st of each year this ORDER remains in effect.
   (b) The Bank's board of directors 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 review, shall forthwith be provided to the Regional Director and the Bank Commissioner.

   [.13] 14. The Bank's board of directors shall appoint a committee (the "Committee") composed of three directors who are not now and have never been involved in the daily operations of the Bank, and whose composition is acceptable to the Regional Director and the Bank Commissioner, to monitor the Bank's compliance with this ORDER. Within 30 days from the effective date of this ORDER, and at monthly intervals thereafter, such Committee shall prepare and present to the Bank's board of directors 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 directors.

   [.14] 15. 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 thereafter, the Bank shall furnish written progress reports to the Regional Director and the Bank Commissioner 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.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, 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: December 9, 1991.
   Pursuant to delegated authority.

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