Regulators railed against lapses in board oversight, thin earnings, an overload of “criticized assets” and shaky policies – among other things – when they recently issued cease and desist orders to Mt. Washington Co-operative Bank and The Community Bank in separate filings.
Of the two, The Community Bank had the longer list of problem areas, getting knocked for “poor credit administration” and “ineffective underwriting standards,” as well as deficient levels of liquidity.
Both bank presidents say the institutions have been working on corrective actions – doing their homework assignments, so to speak – since before the Massachusetts Division of Banks and the FDIC jointly issued the orders.
Of interest: As per those orders, Brockton’s The Community bank must develop a plan to reduce loans or extensions of credit to commercial real estate borrowers, as well as give regulators a month’s notice any time it will make use of volatile liabilities, such as Federal Home Loan Bank borrowings.
It also got dinged on compliance with the Bank Secrecy Act, which requires banks to police customers to help prevent money laundering; The Community Bank must now shape up certain weaknesses regulators detected in their last exam.
Prescribed Penance
Both banks have to come up with extensive reports and plans regarding a number of business aspects, scrubbing through the suspect portfolios and policies. For example, they must hire consultants to scrutinize management staffing and practices, coming up with a “written analysis and assessment of the bank’s board, operating management, and staffing needs,” as The Community Bank order put it.
Both banks must reduce exposure to loans labeled “substandard,” and both must raise their capital levels: South Boston’s Mt. Washington must get its Tier 1 capital to at least 7 percent of total assets, and The Community Bank’s must reach 8 percent.
Bank presidents point to broader economic issues as the source of their thin capital. The Community Bank’s commercial real estate loans, in particular, have been a drain on the bank, says CEO David W. Curtis.
Construction and development loans made more than three years ago, when housing construction was still brisk, have turned rotten and stayed that way, Curtis said.
The trouble is, “People stopped buying houses three years ago,” he said, and it’s been the simple matter of borrowers being unable to repay.
Down The Road
The Community Bank’s report became official on June 30, but Curtis said the bank has been working to correct the regulators’ issues since the exam itself last winter. Even earlier, it had been aware of capitalization problems well into previous years, and attempted to do an initial public offering for the summer/fall of 2008 – “the worst market for IPOs in 80 years,” Curtis said – which proved unsuccessful.
Instead, The Community Bank has attempted to shore itself up from the inside. The bank has worked to improve earnings, sold off some loans, attempted to operate more efficiently, paid off FHLB advances and, as of close of business on June 30, gotten its Tier 1 capital level up to 6 percent.
“We’re a long way down the road,” he said – although the paperwork, even now, is still nothing to sneeze at.
Mt. Washington, for its part, is moving forward with regulators’ demands, but can look forward to a planned merger with East Boston Savings Bank as a solution.
CEO Edward J. Merritt says Mt. Washington expects to be fully subsumed into East Boston Savings by the fourth quarter of 2009, if all goes according to plan.
Mt. Washington had considered looking for a merger or acquisition partner last year when the souring economy hurt both its loan and investment portfolios, Merritt said, and hit upon a solution with East Boston Savings.
“The bottom line is it’s a tough economy. The capital levels are thinner than other banks that are out there, and as a result, we thought that it was in the best interest of our [depositors and customers] to pursue other options,” he said.
