Federal Deposit
Insurance Corporation

{{6-30-94 p.C-3299}}
   [¶10,841] In the Matter of Community Savings Bank, Lawrence, Massachusetts, Docket No. FDIC-93-150b (7-13-93).

   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 with inadequate capital; 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; operating with excessive interest rate risk exposure; and operating without proper internal routine and controls. (This order was terminated by order of the FDIC dated 4-7-94; see ¶ 15,847.)       [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Loan Loss Reserve—Establish/Maintain
   [.4] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.5] Loans—Risk Position—Reduce—Written Plans Required
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Loans—Overdue—Accrual of Interest
   [.8] Loan Policy—Written Revision—Minimum Requirements
   [.9] Profit Plan—Minimum Requirements
   [.10] Funds Management—Written Policy Required
   [.11] Investment Policy—Revision—Minimum Requirements
   [.12] Audits—Written Policy Required
   [.13] Technical Exceptions—Eliminate/Correct
   [.14] Violations of Law—Eliminate/Correct
   [.15] Institution-Affiliated Party—Payments to or for Named Individual—Prohibited

In the Matter of

COMMUNITY SAVINGS BANK
LAWRENCE, MASSACHUSETTS
(Insured State Nonmember Bank)
ORDER TO CEASE
AND DESIST
FDIC-93-150b
   Community Savings Bank, Lawrence, 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 June 23, 1994, whereby solely for the purpose of this proceeding and without admitting or denying any allegation or implication of fact or the existence of any unsafe or unsound banking practices or violations of law and/or regulations, the Bank consented to the issuance of {{6-30-94 p.C-3300}}this 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:

   IT IS HEREBY ORDERED that the Bank and its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u) (to the extent such parties are subject to this ORDER pursuant to the ACT), cease and desist from the following unsafe or unsound banking practices and violations of law and/or regulations:
   (a) operating with an excessive volume of adversely classified assets;
   (b) engaging in hazardous lending and lax collection practices, including maintaining an excessive volume of adversely classified loans;
   (c) operating with inadequate capital for the kind and quality of assets held;
   (d) engaging in violations of applicable laws and regulations;
   (e) operating with management whose policies and practices are detrimental to the Bank;
   (f) operating with deficient or inadequate loan documentation, including but not limited to current financial statements, insurance coverage, and cash flow and/or operating information;
   (g) engaging in practices which result in inadequate operating income and excessive loan losses;
   (h) failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and/or regulations;
   (i) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   (j) failing to submit Reports of Condition and Income in accordance with prevailing instructions;
   (k) operating with excessive interest rate risk exposure; and
   (l) operating without proper internal routine and controls.
   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 as set forth below. However, 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), the Bank will not be deemed to be in violation of paragraphs (a) through (l) above, except to the extent that the Bank is not in compliance with the following provisions:

[.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 include a President with proven ability in managing a bank of comparable size and experience in upgrading a low quality loan portfolio. Such persons shall be provided the necessary written authority to implement the provisions of this ORDER. The qualifications of management shall be assessed on its ability to take effective action toward the accomplishment of the following goals:

   (i) compliance with the requirements of this ORDER,
   (ii) operation of the Bank in a safe and sound manner,
   (iii) compliance with applicable laws and regulations, and
   (iv) restoration and/or maintenance of all aspects of the Bank to/in a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness and liquidity.

[.2] (b) Within sixty (60) days from the effective date of this ORDER, the Board of Trustees, shall develop a written anal- {{9-30-93 p.C-3301}}ysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:

   (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank;
   (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
   (iii) evaluation of each Bank officer, and in particular the President, to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and
   (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the Board of Trustees 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.

(d) (i) The written management plan shall also include the requirement that the Board of Trustees 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 (or other comparable committee) of the Bank, and at each succeeding meeting of that committee at which individuals are nominated for the office of trustee, 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 Trustees 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 $300,000 or five (5.0) percent of the Bank's total equity capital and allowance for loan and lease losses, whichever is greater.

[.3] 2. (a) If not previously accomplished, within ten (10) days from the effective date of this ORDER, the Bank shall have increased its allowance for loan and lease losses ("Reserve") existing as of September 30, 1992 by $1,862,000 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" in the FDIC Report of Examination of the Bank as of November 30, 1992 ("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 loans 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 Trustees shall review the Bank's policy for determining the adequacy of the Bank's Reserve and shall make any appropriate changes to such policy necessary to result in 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 should 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 Trustees and adjustments to the Reserve will be made accordingly. Details of these reviews will be incorporated into the minutes of the Board of Trustees, 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, 1992 and the effective date of this ORDER, shall, at a minimum, reflect a Reserve 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 ten (10) 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 Trustees of the Bank shall: (1) review the adequacy of the Bank's Reserve, (2) cause the Bank to provide for an adequate Reserve, and (3) cause the Bank to 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.

[.4] 3. (a) (i) By December 31, 1993, the Bank shall have Tier 1 capital at or in excess of three and one-half (3.5) percent of the Bank's total assets ("Tier 1 leverage capital ratio") and shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level until June 30, 1994; by June 30, 1994 the Bank shall have a Tier 1 leverage capital ratio at or in excess of four (4.0) percent and shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level until December 31, 1994; by December 31, 1994 the Bank shall have a Tier 1 leverage capital ratio at or in excess of four and one-half (4.5) percent and shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level until June 30, 1995; by June 30, 1995 the Bank shall have a Tier 1 leverage capital ratio at or in excess of five (5.0) percent and shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level until December 31, 1995; by December 31, 1995 the Bank shall have a Tier 1 leverage capital ratio at or in excess of {{9-30-93 p.C-3303}}six (6.0) percent and shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level as calculated herein which this ORDER is in effect. Toward this end, the Bank shall develop a Capital Plan which will be submitted to the Regional Director and the Commissioner for approval by July 9, 1993. The Capital Plan should address both internal and external sources of capital augmentation, including capital infusions, retention of earnings, restrictions of asset growth, and asset sales.
   (ii) For 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, 12 C.F.R. Part 325.
   (b) In calculating the Bank's Tier 1 leverage capital ratio under paragraph 3(a) initially, the Bank shall first comply fully with paragraphs 2(a) and (b) of this ORDER. Thereafter, such ratio and its component parts shall be determined only after the Bank has made such additions to its Reserve so as to bring the Reserve into compliance with the prevailing requirements of the Instructions and charged off any losses identified subsequent to the Examination.
   (c) Any increase in the Tier 1 leverage capital ratio made by the Bank in order to meet the requirements of paragraph 3(a) of this ORDER may be accomplished by:

   (i) the sale of new offerings of common stock or perpetual preferred stock;
   (ii) the collection of all or part of assets classified "Loss" within the Examinations without loss or liability to the Bank. Reductions to loans and leases classified "Loss" shall first be credited to the Bank's Reserve and, if the Board of Trustees' review of the adequacy of the Reserve required by paragraph 2 of this ORDER indicates that such Reserve has a balance in excess of that required for adequacy, any such excess may be transferred to equity capital through a negative provision to the Reserve;
   (iii) the collection in cash of assets previously charged off;
   (iv) any combination of the above means; or
   (v) any other means acceptable to the Regional Director and the Commissioner.

[.5] 4. (a) Within thirty (30) days from the effective date of this ORDER, the Board of Trustees 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 $200,000 and each parcel of other real estate ("ORE") with book value in excess of $250,000 which were classified "Substandard" or "Doubtful" in whole or in part, as of November 30, 1992. The Bank shall add to its written plan of action loans in excess of $200,000 and ORE in excess of $250,000 which are so classified in any subsequent examination. 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
   (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position; and
   (iii) in the case of ORE, evaluate the property and provide cost-benefit analyses of holding the property versus current liquidation value.

   [.6] 5. The Bank shall not extend or renew, directly or indirectly, credit to, or know- {{9-30-93 p.C-3305}}ingly for the benefit of, any borrower who or which has a loan or other extension of credit with the Bank that has been charged off or classified in the Examination, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected, unless a majority of the Bank's Board of Trustees first (1) determines that such extension or renewal is in the best interest of the Bank, (2) determines that the Bank has satisfied the requirements set out in paragraph 4(a) of this ORDER as to such borrower, and (3) approves such extension or renewal, either individually or as part of the Bank's work out plan for the borrower. A written record of the Board of Trustees' determination and approval of any extension or renewal 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 Trustees. Notwithstanding the foregoing, this ORDER shall not require such approvals by the Board of Trustees for extensions of credit made pursuant to legally binding contractual commitments entered into by the Bank prior to May 20, 1993. For purposes of this paragraph 5, the Bank shall be deemed to have extended or renewed credit knowingly for the benefit of a borrower if the Bank knew or, upon reasonable inquiry could have known, that the extension of credit was directly or indirectly for the benefit of the borrower.

   [.7] 6. The Bank shall not accrue interest on any loan that is, or becomes, ninety (90) days or more delinquent as to principal or interest, unless the loan is both well secured and in the process of collection. For purposes of this paragraph 6, "well secured" and "in the process of collection" shall have the same meaning as those terms have in the prevailing Instructions for the Reports of Condition and Income. The Bank shall reverse on its books all previously accrued but uncollected interest on any loan that has ceased to accrue interest pursuant to this provision.

[.8] 7. (a) Within thirty (30) days from the effective date of this ORDER, the Bank shall revise its written loan policy to include, at a minimum:

   (i) appropriate limitations on extensions of credit through overdrafts and cash items;
   (ii) a prohibition of capitalization of accrued and unpaid interest on loans; and
   (iii) procedures for designations of nonaccrual loans.

[.9] 8. (a) Within sixty (60) 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 may be a part of the Capital Plan referred to in paragraph 3(a)(i) above. The written profit plan shall include, at a minimum:

   (i) identification of the major areas in, and means by, which the Board of Trustees 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
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   (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

[.10] 9. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall revise its written funds management policy to include, at a minimum:

   (i) the Bank's liquidity needs and plans for insuring that such needs are met on an ongoing basis;
   (ii) goals and strategies for managing and/or improving the Bank's interest rate risk exposure;
   (iii) monitoring of the interest rate sensitivity of present investments and deposits and projections of the types of investments and deposits to improve such liquidity position;
   (iv) coordination of the Bank's loan, investment, operating, and budget and profit planning policies with the written funds management policy;
   (v) empower the Asset Liability Committee to perform its oversight responsibilities; and
   (vi) receipt by the Board of Trustees of sufficient information concerning interest rate risk on a monthly basis.

   [.11] 10. Within thirty (30) days from the effective date of this ORDER, the Bank shall revise its written investment policy consisting of goals and strategies for improving the quality of the Bank's investment portfolio, including limitations and acceptable terms for federal funds sold transactions. The revised written investment policy shall be submitted to the Regional Director and the Commissioner for review and comment within such thirty-day period. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Trustees shall approve the revised written investment policy, taking into consideration any written comments received from the Regional Director and/or the Commissioner within the thirty-day period following such submission, and such approval shall be recorded in the minutes of the Board of Trustees. Subsequent modifications to the revised written investment policy may be made only after giving the Regional Director and the Commissioner written notice of the proposed modification, and after consideration of any written responsive comments received from 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 Trustees, and such {{9-30-93 p.C-3307}}approval shall be recorded in the minutes of the Board of Trustees. The Bank, its trustees, officers and employees shall follow the revised written investment policy and/or any subsequent modification thereto.

   [.12] 11. Within sixty (60) days from the effective date of the ORDER, the bank shall develop a written audit policy which shall include the scope and frequency of internal and external audit functions. The written audit policy shall be submitted to the Regional Director and the Commissioner for review and comment within such sixty day period. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Trustees shall approve the written audit policy, taking into consideration any written comments received from the Regional Director and/or the Commissioner within the thirty-day period following such submission, and such approval shall be recorded in the minutes of the Board of Trustees.

[.13] 12. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall correct the remediable technical exceptions on loans noted on pages 2-e and 2-e-1 of the Examination.
   (b) Within sixty (60) days from the effective date of this ORDER, the Bank shall formulate and implement a plan to reduce all concentrations as noted on pages 2-b and 2-b-1 of the Examination to less than twenty-five (25.0) percent of the Bank's Tier 1 capital.
   (c) Within sixty (60) days from the effective date of this ORDER, the Bank shall correct the remediable cited deficiencies in the loans listed for "Special Mention" on page 2-c of the Examination.
   (d) Within sixty (60) days from the effective date of this ORDER, the Bank shall correct the cited internal routine and control deficiencies cited on page 6-b of the Examination.

   [.15] 15. As of the effective date of this ORDER, the Bank shall not make any payments directly or indirectly to, or knowingly for the benefit of, former Trustee Sidney H. Soreff without the prior written consent of the Regional Director and the Commissioner. For purposes of this paragraph 15, the Bank shall be deemed to have made a payment knowingly for the benefit of former Trustee Sydney H. Soreff if the Bank knew or, upon reasonable inquiry could have known, that the payment was directly or indirectly for the benefit of Mr. Soreff.
   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 the ORDER pursuant to the Act).
   This ORDER has been reviewed and concurred in by the Commissioner.
   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 Westwood, Massachusetts this 13th day of July, 1993.
   Pursuant to delegated authority.