Federal Deposit
Insurance Corporation

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   [¶10,510] In the Matter of Hometown Bank, Edison, New Jersey, Docket No. FDIC-92-107b (4-9-92).

   Bank to cease and desist from such unsafe or unsound practices as following hazardous lending and lax collection practices; operating with inadequate capital; operating with an excessive level of poor quality assets; operating with inadequate allowance for loan and lease losses; operating with inadequate liquidity and funds management; operating without proper internal routine and controls; engaging in practices which produce inadequate operating income; operating in violation of applicable laws or regulations; operating without senior management; operating with board that fails to provide adequate supervision over the Bank's affairs. (This order was terminated by order of the FDIC dated 10-14-92; see ¶ 15,538.)

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   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] Budget and Earnings Forecast—Preparation Required
   [.5] Assets—Adversely Classified—Eliminate/Reduce
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Assets—Problem Assets—Individual Written Plans Required
   [.8] Loan Policy—Written Revision—Minimum Requirements
   [.9] Loan Portfolio—Review and Grading System Required
   [.10] Violations of Law—Eliminate/Correct
   [.11] Funds Management—Written Policy Required
   [.12] Loans—Special Mention—Correct Deficiencies
   [.13] Dividends—Restricted
   [.14] Shareholders—Disclosure—Cease and Desist Order
   [.15] Compliance Reports—Frequency

In the Matter of

HOMETOWN BANK
EDISON, NEW JERSEY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-107b

   Hometown Bank, Edison, New Jersey ("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 the alleged charges under section 8(b) of the Federal Deposit Insurance Act ("Act'), 12 U.S.C. § 1818(b), 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 April 9, 1992, whereby, solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and 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 committed violations of law and/or regulations. The FDIC therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS HEREBY ORDERED that the Bank, its successors, assigns, directors, officers, employees, agents, 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 and violations:
   (a) Engaging in hazardous lending and lax collection practices;
   (b) Operating the Bank with inadequate capital in relation to the kind and quality of assets held by the Bank;
   (c) Operating the Bank with an excessive volume of poor quality assets;
   (d) Operating the Bank with an inadequate allowance for loan and lease losses;
   (e) Operating the Bank with inadequate liquidity and funds management;
   (f) Operating the Bank with inadequate routine and controls;
   (g) Operating the Bank in such a manner as to produce unsatisfactory earnings;
   (h) Engaging in violations of applicable State laws and regulations, as more fully set forth on pages 6-a through 6-a-2 of the Report of Examination of the Bank by the FDIC as of October 28, 1991;
   (i) Operating the Bank without senior management; and
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   (j) Operating the Bank with a board of directors which has failed to provide adequate supervision over and direction to the operating management of the Bank.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. (a) Within 90 days from the effective date of this ORDER, the Bank shall have management qualified to restore the Bank to a sound condition. Such management shall include an experienced chief executive officer, senior lending officer, and chief financial officer, each of whom shall be given stated written authority by the Bank's board of directors. Such written authority shall include the responsibility for implementing and maintaining lending policies and other Bank policies in accordance with sound banking practices.
   (b) During the life of this ORDER, the Bank shall notify the Regional Director of the New York Regional Office of the FDIC ("Regional Director") and the Commissioner of Banking of the State of New Jersey ("Commissioner") in writing of any resignations and/or terminations of any members of its board of directors and/or any of its senior executive officers.
   (c) The Bank shall comply with section 32 of the Act, 12 U.S.C. § 1831i, which includes a requirement that the Bank shall notify the Regional Director and the Commissioner in writing at least 30 days prior to any individual assuming a new position or any additions to its board of directors and/or senior executive officers.

   [.2] 2. (a) Within 120 days from the effective date of this ORDER, the Bank shall increase its Tier 1 capital to not less than $3,500,000. Within 120 days from the effective date of this ORDER, and during the life of this ORDER, the Bank shall maintain adjusted Tier 1 capital equal to or greater than 7.5 percent of the Bank's adjusted Part 325 total assets.
   (b) Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 2(a) of this ORDER may be accomplished by the following:

   (i) The sale of new securities in the form of common stock; or
   (ii) The direct contribution of cash by the directors, shareholders, or parent bank holding company of the Bank; or
   (iii) Any combination of the above or other method acceptable to the FDIC.

   [.3] 3. (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 allowance 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 3(a) of this ORDER, the Bank's board of directors shall adopt a method of computing the balance of the Bank's allowance 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 3(a). Thereafter, the Bank's board of directors shall, during the first month of each quarter, reevaluate the allowance for loan and lease losses and make such additional provisions for loan and lease losses that are necessary to maintain the allowance at an adequate level relative to the volume of risk in the Bank's loan portfolio. All such additional provisions for loan and leases losses shall be made in the first month of the calendar quarter in which the deficiency in the allowance 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 allowance shall be maintained for future regulatory review.
   (c) All increases in the allowance for loan and lease losses, with the exception of recoveries credited directly to the allowance, shall be accomplished by charges to operating earnings through the provision for loan and lease losses.

   [.4] 4. (a) Within 60 days from the effective date of this ORDER, and within the first 30 days of each calendar year thereafter, the board of directors of the Bank shall develop a written earnings plan consisting of goals and strategies for improving the earnings of the Bank for each calendar year. The written earnings 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 on not less than a quarterly basis; and
   (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   [.5] 5. 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
{{6-30-92 p.C-2156}}FDIC and the Commissioner as a result of their joint examination of the Bank as of October 28, 1991 ("October 1991 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 the receipt of any subsequent Report of Examination of the Bank from the FDIC or the 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 ORDER.
   6. (a) 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 Commission as a result of their October 1991 Examination, to not more than 50 percent of Tier 1 capital, and, within 540 days from 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.
   (b) As used in this ORDER, the word "replace" 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 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 this ORDER.

   [.6] 7. (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. The provisions of this paragraph 7(a) shall not apply to the advance of funds of the Bank for the sole purpose of maintaining or protecting the Bank's real estate collateral for any extension of credit, up to a maximum amount of $50,000 in the aggregate for all such advances, with respect to each real estate property securing, in whole or in part, all such extensions of credit.
   (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 other extension of credit that has been adversely classified, in whole or in part, by the FDIC and the Commissioner as a result of their October 1991 Examination or as a result of any subsequent examination of the Bank by the FDIC or the 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 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 to any extension of credit to a classified borrower who is not subject to the prohibitions of paragraph 7(a) of this ORDER, if:

   (i) the Bank's failure to extend further credit to a classified borrower would be substantially detrimental to the best interest of the Bank;
   (ii) a comparison with the written program adopted pursuant to paragraph 8 of this ORDER shows that the Bank's formal program to eliminated 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

   [.7] 8. Within 30 days from the effective date of this ORDER, the Bank's board of directors shall adopt and implement a written program for each problem asset. Subsequent to the effective date of this ORDER, within 30 days after any asset of the Bank becomes a problem asset, the board of directors of the Bank shall adopt and implement a written program for each such problem asset. For the purposes of this ORDER, a "problem asset" means any asset (including any unfunded commitment) which exceeds $50,000 and:

   (a) Has been adversely classified or listed for "Special Mention" by the FDIC or the Commissioner as a result of their October 1991 Examination, or is adversely classified or listed for "Special Mention" by either the FDIC or the Commissioner as a result of any subsequent examination of the Bank; or
   (b) Has been accorded a sub-investment quality rating and/or has been designated a work-out or watch list asset, or some equivalent designation, as the result of an internal asset review and rating procedure performed by the Bank or by another party on behalf of the Bank; or
   (c) Is past due in excess of 120 days and/or has been placed in either a nonaccrual or nonearning status by the Bank; or
   (d) Has been partially charged off.

   [.8] 9. Within 60 days from the effective date of this ORDER, the Bank shall review its written loan and collection policy and make whatever changes may be necessary to provide for the safe and sound administration of all aspects of the lending and collection function. Specific procedures shall be included for prior approval of loans to directors, officers and principal shareholders and their related interests in compliance with applicable laws and regulations. Loan documentation, repayment programs, collection and charge-off procedures and internal loan review shall also be included as a part of the review. The Bank shall adopt changes it considers necessary and appropriate and management shall reaffirm its intent to comply with the policy, as amended. Evidence of management's reaffirmation shall be reduced to writing. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.9] 10. (a) Within 30 days from the effective date of this ORDER, the board of directors of the Bank shall establish an internal loan review and grading system ("System") to periodically review the Bank's loan portfolio and identify and categorize problem credits. At a minimum, the System shall provide for:

   (i) identifying the overall quality of the loan portfolio;
   (ii) the identification and amount of each delinquent loan;
   (iii) an identification or grouping of loans that warrant the special attention of management;
   (iv) for each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the reason(s) why the particular loan merits special attention;
   (v) an identification of credit and collateral documentation exceptions;
   (vi) the identification and status of each violation of law, rule or regulation;
   (vii) an identification of loans not in conformance with the Bank's lending policy, and exceptions to the Bank's lending policy;
   (viii) an identification of insider loan transactions; and
   (ix) a mechanism for reporting periodically, but in any event no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.

   [.10] 11. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of State law and regulations, as described on pages 6-a through 6-a-2 of the Report of Examination of the Bank by the FDIC as of October 28, 1991. In addition, the Bank shall take all steps necessary to ensure future compliance with all applicable Federal and State laws and regulations.

   [.11] 12. Within 60 days from the effective date of this ORDER, the Bank shall develop or revise, adopt, and implement a written liquidity and funds management policy. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.12] 13. Within 60 days from the effective date of this ORDER, the Bank shall take all necessary steps to eliminate all deficiencies noted in all assets scheduled as "Special Mention" by the FDIC and the Commissioner as a result of their October 1991 Examination, and, within 60 days after receipt of each subsequent Report of Examination from the FDIC or the Commissioner, the Bank shall take the necessary steps to eliminate all deficiencies noted in all assets scheduled as "Special Mention" in each such Report.

   [.13] 14. The Bank shall not declare or pay dividends in any amount, except as follows:

   (a) Such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
   (b) That after payment of such dividends, the ratio of adjusted Tier 1 capital to adjusted Part 325 total assets of the Bank will be not less than 7.5 percent;
   (c) That such declaration and payment of dividends shall be approved in advance by the board of directors of the Bank; and
   (d) That such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director and the Commissioner.

   [.15] 16. By the 30th 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 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 issuance.
   The provisions of this ORDER shall be binding upon the Bank, its successors, assigns, directors, 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 mod- {{6-30-93 p.C-2159}}ified, terminated, suspended, or set aside by the FDIC.
   Dated: April 9, 1992.
   Pursuant to delegated authority.