Federal Deposit
Insurance Corporation

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   [11,425] In the Matter of Leicester Savings Bank, Leicester, Massachusetts, FDIC Docket No. 97-027b (7-10-97)

   A cease-and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound banking practices.

   [.1] Management—Qualifications Specified
   [.2] Management—Written Policy Required
   [.3] Loan Loss Reserve—Establishment of or Increase in Required
   [.4] Loans—Reduction Required
   [.5] Loan Loss Reserve—Policy for Determining Adequacy of
   [.6] Capital—Increase Required
   [.7] Loans-Risk Position—Written Plan Required
   [.8] Loans—Extensions of Credit—Curtail to Existing Borrowers
   [.9] Loans—Interest—Accrual of
   [.10] Loan Policy—Preparation or Revision of Policy Required
   [.11] Loans—Special Mention
   [.12] Loan Policy—Conflicts of Interest
   [.13] Bank Secrecy Act—Develop Policy
   [.14] Loans—Internal Review Procedure
   [.15] Management Letter and Audit Report, Compliance Report to the FDIC

In the Matter of

LEICESTER SAVINGS BANK
LEICESTER, MASSACHUSETTS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-97-027b
   Leicester Savings Bank, Leicester, 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 26, 1997, 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, ac- {{9-31-97 p.C-4378}}cepted 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), 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, title searches or legal opinions, and cash flow and/or operating information;
   (g) engaging in practices which produce 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 without proper internal routine and controls;
   (l) operating without a proper Bank Secrecy Act program;
   (m) operating without an effective internal audit program.

   [.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 chief executive officer with proven ability in managing a bank of comparable size and experience in upgrading a low quality loan portfolio. Such person 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:

   (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.

   [.2] (b) Within sixty (60) days from the effective date of this ORDER, the Board of Trustees shall develop a written analysis 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 chief executive officer, and staff members 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 {{9-31-97 p.C-4379}}maintenance of the Bank in a safe and sound condition; and
   (iv) a plan of action to recruit and hire any additional 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.

   [.3] 2. (a) Within ten (10) days from the effective date of this ORDER, the Bank shall increase its allowance for loan and lease losses ("Reserve") existing as of September 30, 1996 by $250,000 at a minimum.

   [.4] (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 other than extensions of credit or leases classified "Doubtful" in the FDIC Report of Examination of the Bank as of September 23, 1996 ("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.

   [.5] (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 establish 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 nonaccrual 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, includ- {{9-31-97 p.C-4380}}ing 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, as of the effective date of this Order and thereafter, shall, at a minimum, reflect a Reserve that should have been maintained in accordance with the Instructions.
   (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) 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.

   [.6] 3. (a) (i) Within twelve (12) months from the effective date of this ORDER, the Bank shall have Tier 1 capital at or in excess of five (5.0) percent of the Bank's total assets ("Tier 1 leverage capital ratio").
   (ii) Within eighteen (18) months from the effective date of this ORDER, the Bank shall have Tier 1 capital at or in excess of five and one-half (5.5) percent of the Bank's total assets.
   (iii) Within twenty-four (24) months from the effective date of this ORDER, the Bank shall have Tier 1 capital at or in excess of six (6.0) percent of the Bank's total assets. The Bank shall thereafter continue to maintain its Tier 1 leverage capital ratio at or in excess of six (6.0) percent level as calculated herein while this ORDER is in effect.
   (iv) Toward these ends, the Bank shall develop a Capital Plan which will be submitted to the Regional Director and the Commissioner for approval within sixty (60) days from the effective date of this ORDER. 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.
   (v) 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 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;
   (ii) the collection in cash of assets previously charged off;
   (iii) any combination of the above means; or
   (iv) any other means acceptable to the Regional Director and the Commissioner.

   [.7] 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 $50,000 and each parcel of other real estate ("ORE") which was classified "Substandard" or "Doubtful," in whole or in part, as of September 23, 1996. The Bank shall add to its written plan of action loans and ORE in excess of $50,000 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.

   [.8] 5. The Bank shall not extend or renew, directly or indirectly, credit to, or for the benefit of, any borrower who or which as a result of the September 23, 1996 Examination 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 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 of this ORDER as to such borrower, and (3) approves such extension or renewal. 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.
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   [.9] 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, "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.

   7. a) Within sixty (60) days from the effective date of this ORDER, the Bank shall revise its written loan policy, which revision shall include, at a minimum:

   (i) the responsibility of the Board of Trustees in reviewing, ratifying and approving loans and extensions;
   (ii) the guidelines under which unsecured loans will be granted;
   (iii) the guidelines for rates of interest and terms of repayment for unsecured loans and secured loans;
   (iv) with regard to secured loans: (1) limitations on the amount advanced in relation to the value of the collateral, and (2) the documentation required by the Bank for each type of secured loan;
   (v) the maintenance and review of complete and current credit files on each borrower;
   (vi) appropriate and adequate collection procedures, including, but not limited to, the actions to be taken against borrowers who fail to make timely payments;
   (vii) guidelines establishing limitations on the maximum volume of loans in relation to total assets;
   (viii) appropriate limitations on extension of credit through overdrafts and cash items;
   (ix) the determination and documentation of sources and terms of loan repayment;
   (x) retention of lien searches and appraisals covering personal property and liens on real estate;
   (xi) maintenance of written, individual loan file comments by officers;
   (xii) provisions addressing the capitalization of accrued and unpaid interest on loans;
   (xiii) procedures regarding designations of nonaccrual loans;
   (xiv) procedures for identifying, supervising, and collecting problem loans;
   (xv) periodic review of the overdue, problem and/or adversely classified or special mention loans by the Board of Trustees, so as to monitor management's administration of such distressed credits, and to provide guidance;
   (xvi) the guidelines under which private mortgage insurance will be required for residential real estate loans; and
   (xvii) any other loan policy recommendation contained in the Examination.

   [.10] 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 shall include, at a minimum:

   (i) identification of the major areas in, and means by, which the Board of Trust-

ees 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.

   [.11] 9. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall correct the remediable technical exceptions on loans noted in the Examination.
   (b) Within (60) days from the effective date of this ORDER, the Bank shall correct the cited deficiencies in the loans listed for "special Mention" in the Examination.

   [.12] 10. (a) Within (15) days from the effective date of this ORDER, the Bank shall implement policies and procedures to prevent any potential conflicts of interest and/or self dealing transactions with employees, Trustees, and vendors. Furthermore, the bank should consider options for recovery from those individuals and situations discussed in the Examination.

   [.13] 11. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall develop a written Bank Secrecy Act policy consisting of policies and procedures for improving compliance with Bank Secrecy Act requirements.
   (b) Within ten (10) days from the effective date of this Order, the Board of Trustees shall forward all unsubmitted Currency Transaction Reports to the appropriate federal agency.

   [.14] 12. (a) Within thirty (30) days from the effective date of this ORDER, the Board of Trustees shall correct all internal control deficiencies outlined in the Examination.
   (b) Within sixty (60) days from the effective date of this Order, the Board of Trustees shall develop an internal audit program to ensure validity of the Bank's recordkeeping system.

   [13. Within sixty (60) 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 in the Examination. For those violations where restitution is required, it should be made within five (5) days after the effective date of this ORDER.

   [.15] 14. Within forty-five (45) days from the effective date of this ORDER, and, thereafter, 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. 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 Trustees of the Bank and made a part of the minutes of the Board meeting.
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   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.
   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.
   Pursuant to delegated authority.
   Dated at Westwood, Massachusetts this 10th day of July, 1997.