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FDIC Enforcement Decisions and Orders

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{{9-30-94 p.C-1796}}
   [10,413] In the Matter of Marlborough Cooperative Bank, Marlborough, Massachusetts, Docket No. FDIC-91-412b (12-23-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with excessive volumes of adversely classified assets; following hazardous lending and lax collection practices; operating in violation of applicable laws or regulations; operating with management whose policies are detrimental to the Bank; operating with inadequate loan documentation; engaging in practices which produce inadequate operating income; failing to provide adequate supervision over the Bank's affairs; operating with inadequate allowance for loan and lease losses; failing to submit Reports of Condition and Income in accordance with instructions; and operating with excessive interest rate risk exposure. (This order was terminated by order of the FDIC dated 7-7-94; see ¶ 15,886.)

{{2-29-92 p.C-1797}}
   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Board of Directors—Election—Outside Directors Added
   [.4] Allowance for Loan and Lease Losses—Establish/Maintain
   [.5] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.6] Loans—Risk Position—Reduce—Written Plan Required
   [.7] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.8] Loans—Delinquent—Reduction Plan Required
   [.9] Loan Policy—Written Revision—Minimum Requirements
   [.10] Profit Plan—Minimum Requirements
   [.11] Funds Management—Written Policy Required
   [.12] Technical Exceptions—Eliminate/Correct
   [.13] Violations of Law—Eliminate/Correct
   [.14] Compliance Reports—Frequency

In the Matter of

MARLBOROUGH COOPERATIVE
BANK

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

   Marlborough Cooperative Bank, Marlborough, 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 ("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 December 10, 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 (to the extent such parties are subject to this Order pursuant to the Act), as that term is defined in section 3(u) of the Act, 12 U.S.C. section 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 excessive volumes of adversely classified loans and overdue loans;
   (c) engaging in violations of chapter 167E of the Massachusetts General Laws;
   (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 statements, title searches or legal opinions, 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
{{2-29-92 p.C-1798}}Bank to prevent unsafe or unsound practices and violations of law and/or regulations;
   (h) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   (i) failing to submit Reports of Condition and Income prepared in accordance with prevailing instructions;
   (j) operating with excessive interest rate risk exposure.
   IT IS FURTHER ORDERED, that the Bank (and its institution-affiliated parties, to the extent such parties are subject to this order pursuant to the Act) take affirmative action (to the extent such actions have not already been completed by the Bank prior to the issuance of this ORDER) as set forth below. Solely for purposes of enforcement of this ORDER by the FDIC pursuant to section 8(i) of the Act, 12 U.S.C. § 1818(i)(1), the Bank (and its institution-affiliated parties, to the extent such parties are subject to this order pursuant to the Act) will not be deemed to be in violation of provisions (a) through (j) above, except to the extent that the Bank is not in compliance with the following:

   [.1] 1. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall have an appropriate level of lending, collection and loan supervision experience for the type and quality of the Bank's loans. 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 Boston Regional Office ("Regional Director") and the Commissioner of Banks for the Commonwealth of Massachusetts ("Commissioner") in writing of any changes in management at the level of vice-president and above. The notification must include the names and background of any replacement personnel and must be provided prior to the individual's assuming the new position.

   [.2] (b) In order to have acceptable management, within thirty (30) days from the effective date of this ORDER, the Board of Directors shall review the written analysis and assessment of the Bank's management and staffing needs ("management plan"), prepared for the Bank and delivered to the FDIC on October 19, 1990, with particular attention to:

       (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 in particular the President, and staff member 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, in particular a collections officer, 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) Any proposed amendments to 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 forty-five (45) days after such submission, the Board of Directors shall approve any such amendments to 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
{{2-29-92 p.C-1799}}the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and/ or 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.

   [.3] (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 Bank complies with the provisions of this ORDER.
   (ii) At the next meeting of the nominating committee of the Bank, and at each succeeding meeting of that committee at which individuals are nominated for the office of director, the committee shall nominate individuals 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, (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 (5.0) percent of the Bank's total equity capital and allowance for loan and lease losses.
   (e) The Bank's Board of Directors shall continue to meet at least monthly. The Board shall continue to 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 continue to be maintained and recorded on a timely basis.

   [.4] 2. (a) Within ten (10) days from the effective date of this ORDER, the Bank shall increase (to the extent not already accomplished) its allowance for loan and lease losses ("Reserve") existing as of December 31, 1990 by $1,500,000 at a minimum.
   (b) Immediately after complying with paragraph 2(a), the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" and fifty (50.0) percent of all assets or portions of assets classified "Doubtful" in the March 4, 1991 Report of Examination ("Examination"), which have not been previously collected or charged off. Reduction of these assets through use of proceeds of loans made by the Bank, other than to qualified third party borrowers, does not constitute "collection" or "elimination" for the purpose of this paragraph.
   (c) Thereafter, the Bank shall maintain its Reserve in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income ("Instructions"). Toward this end, within sixty (60) days from the effective date of this ORDER, the Bank's Board of Directors shall maintain a comprehensive policy for determining the adequacy of the Bank's Reserve. The policy shall provide for a review of the Reserve at least once each calendar quarter. The review will focus on the results of the Bank's internal loan review, loan loss experience, trends of delinquent and non-accrual loans, an estimate of potential loss exposure on significant credits, concentrations of credit, and present and prospective economic conditions. Review of other real estate and exposure therein shall be undertaken along the same lines as the aforementioned loan portfolio review. The adequacy of the Reserve in relation to the loss potential in the loan portfolio will be reviewed by the Board of Directors and adjustments to the Reserve will be made accordingly. De- {{2-29-92 p.C-1800}}tails of these reviews will be incorporated into the minutes of the Board of Directors, including the methodology used to determine the adjustments made.
   (d) Reports of Condition and Income required to be submitted by the Bank as of each Report date, as that term is used in the Instructions, between and including December 31, 1990 and the effective date of this ORDER, shall, at a minimum, reflect a Reserve that should have been maintained in accordance with the Instructions. If necessary to comply with this paragraph 2(d), the Bank shall file amended Reports of Condition and Income within thirty (30) days from the effective date of this ORDER.
   (e) 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 Reserve, (2) provide for an adequate Reserve, and (3) accurately report the Reserve 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 the review, including any increases in the Reserve, and the basis for determining the amount of allowance provided.

   [.5] 3. (a) If, during the period this ORDER is in effect, the ratio of Tier 1 capital to total assets ("Tier 1 leverage capital ratio") declines below six (6.0) percent as of the end of any calendar month, the Bank, within ninety (90) days after the date on which such ratio so declined, shall (i) develop a written plan to increase such ratio up to or in excess of six (6.0) percent and (ii) submit such written plan to the Regional Director and the Commissioner for review and comment. No more than sixty (60) days after such submission, the Board of Directors shall (i) approve the written plan, taking into consideration any regulatory comments, (ii) record such approval in its minutes and (iii) implement the approved plan. No more than ninety (90) days from submission, the Bank's Tier 1 leverage capital ratio shall equal or exceed five and one-half (5.5) percent, and no more than two hundred and seventy (270) days from such submission, the Bank's Tier 1 leverage capital ratio shall equal or exceed six (6.0) percent, and the Bank shall thereafter continue to maintain this ratio at or in excess of such level as calculated herein while this ORDER is in effect. In no event shall the Bank's Tier 1 leverage capital ratio fall below two (2.0) percent while this Order is in effect.
   (b) For purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in the revised Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, which became effective April 10, 1991.
   (c) In addition to the requirements of paragraphs 3(a) and (b), the Bank shall comply with the FDIC's Statement of Policy on Risk-Based Capital found in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, App. A.

   [.6] 4. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall develop 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 $100,000, and each parcel of other real estate with book value in excess of $100,000, which was classified "Substandard" or "Doubtful," in whole or in part, as of March 4, 1991. In developing such plan, the Bank shall, at a minimum:

       (i) in the case of loans, review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources, and evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position; and
       (ii) in the case of other real estate, provide current liquidation value and consider whether the Bank should continue to hold the property.
   Based upon such review and evaluation, the written plan of action shall: (A) within six (6) and twelve (12) months from the effective date of this ORDER, establish target dollar levels to which the Bank shall reduce the aggregate dollar volume of "Substandard" or "Doubtful" classifications as of March 4, 1991 as well as any additional assets that are in need of similar criticism according to internal Bank review; and (B) provide for the submission of written monthly progress reports
{{2-29-92 p.C-1801}}to the Bank's Board of Directors for review and notation in the Board minutes for any such assets over $100,000. Exhibit A provides the form for the progress report. As used in this paragraph 4, "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 Division of Banks, Commonwealth of Massachusetts. Payment of loans with the proceeds of other loans made by the Bank, other than loans to qualified third-party borrowers, will not constitute "collection" for purposes of this ORDER.
   (b) The written plan of action described by paragraph 4(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 that relate to the Bank's overall workout strategy, as opposed to a specific loan, 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/or the Commissioner within ten (10) 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 plan of action and/or any subsequent modification thereto.

   [.7] 5. 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 4 of this ORDER as to such borrower, if applicable, and (3) approves such advance. A written record of the Board of Directors' determination and approval of any advance under the terms of this paragraph 5 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the Board of Directors. The provisions of this paragraph shall not apply to any legally binding commitment entered into by the Bank prior to the effective date of this Order.

   [.8] 6. Within ninety (90) days from the effective date of this ORDER, the Bank will develop a plan to reduce and maintain overall delinquent loans to a level below eight (8) per cent of total loans. Delinquent loans for the purposes of this Order will be determined as of the last day of each month. "Reduce" will mean that a delinquent loan is paid current to within thirty (30) days of its next due date through collection efforts and without the advance of funds by the bank in any manner.

   [.9] 7. Within sixty (60) days from the effective date of this ORDER, the Bank 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.

   [.10] 8. (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 {{2-29-92 p.C-1802}}no circumstances more than sixty (60) 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/or 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.

   [.11] 9. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall develop a written funds management policy which shall include, at a minimum:

       (i) goals and strategies for managing and/or improving the Bank's interest rate risk exposure;
       (ii) monitoring of the interest rate sensitivity of present investments and deposits and projections of the types of investments and deposits;
       (iii) specific limits on interest rate risk exposure; and
       (iv) coordination of the Bank's loan, investment, operating, and budget and profit planning policies with the written funds management policy.
   (b) The written funds management policy 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 funds management policy, 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 funds management policy 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/or 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 funds management policy and/or any subsequent modification thereto.

   [.12] 10. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall correct the remediable technical exceptions on loans noted on page 2-d of the joint Commonwealth/FDIC Report of Examination of the Bank as of March 4, 1991.
   (b) Within ninety (90) days from the effective date of this ORDER, the Bank shall formulate and begin to implement a plan to reduce the industry concentration in loans secured by non-owner-occupied rental housing as noted on page 2-b of the joint Commonwealth/FDIC Report of Examination of the Bank as of March 4, 1991 to less than thirty (30.0) percent of the Bank's total loans.

   [.13] 11. Within ninety (90) 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 page 6-a of the Joint Commonwealth/FDIC Report of Examination of the Bank as of March 4, 1991.

   [.14] 12. Within forty-five (45) 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. These progress reports should include, but not be limited to, copies of the latest monthly criticized asset reports as submitted by the Board of Directors of the Bank and outlined in paragraph 4 and Exhibit A of this 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 Directors of the Bank and made a part of the minutes of the Board meeting.
{{2-29-92 p.C-1803}}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, to the extent such parties are subject to this Order pursuant to the Act.
   This ORDER has been reviewed and concurred in by the Commissioner of Banks of the Commonwealth of Massachusetts.
   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.
   Dated at Needham, Massachusetts this 23rd day of December, 1991.
   Pursuant to delegated authority.

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