SUPERVISORY AGREEMENT

Directors (Board) of Malvern Federal Savings Bank, Paoli, Pennsylvania, OTS Docket No. 00416 (Association)

and the Office of Thrift Supervision (OTS), acting by and through its Regional Director for the Northeast Region

(Regional Director);

agreements to ensure the establishment and maintenance of appropriate safeguards in the operation of the entities it regulates; and

     WHEREAS, in furtherance of their common goal to ensure that the Association addresses the unsafe or unsound practices and/or

violations of law or regulation identified by the OTS in the February 22, 2010 Report of Examination (2010 ROE), the Association and the

OTS have mutually agreed to enter into this Agreement; and

Resolution) that authorizes the Association to enter into this Agreement and directs compliance by the Association and its

directors, officers, employees, and other institution-affiliated parties with each and every provision of this Agreement.

(b)   strategies for ensuring that the Association has the financial and personnel resources necessary to implement and adhere

 to the Business Plan, adequately support the Association's risk profile, maintain compliance with applicable regulatory capital

requirements, and comply with this Agreement;

 

(c)   quarterly pro forma financial projections (balance sheet, regulatory capital ratios, and income statement) for each quarter

covered by the Business Plan that are presented in a format consistent with the Thrift Financial Report (TFR); and

 

(d)   identification of all relevant assumptions made in formulating the Business Plan and a requirement that documentation

supporting such assumptions be retained by the Association.

 

(b)   contain an analysis and explanation of identified variances; and

 

(c)   discuss the specific measures taken or to be taken to address identified variances.

 

(a)  ensure the accurate and timely identification, classification, and reporting of the Association's assets, including all classified

assets and the designation of loans as special mention or placement of loans on a watch list  if a borrower's credit standing has

deteriorated;

 

(b)  detail the Association's loan grading system and specify parameters for the identification of problem loans for each type

 of loan offered by the Association;

 

(c)  establish specific review and classification standards for any loans where interest, loan fees, late fees, loan costs,

or collection costs of problem loans have been capitalized into the loan balance;

 

(d)  require asset reviews and updates for commercial real estate, construction and land development, multi-family, and

commercial loans to be conducted not less than every six (6) months by a qualified independent third-party loan review

consultant with expertise in loan review and classification (Loan Review Consultant);

 

(e)     include the adoption of any loan risk ratings recommended by the Loan Review Consultant or fully document in

the Asset Review Committee minutes any risk rating recommendations not adopted and the reasons for not adopting

the recommendations of the Loan Review Consultant; and

8.   The Board's review of the IAR Program shall be documented in the Board meeting minutes. A copy of the IAR Program shall be provided to the Regional Director within ten (10) days of adoption by the Board.

 

9.   Within sixty (60) days, the Association shall develop and implement a detailed, written plan with specific strategies, targets and timeframes to reduce2 the Association's level of problem assets3 (Problem Asset Reduction Plan). The Problem Asset Reduction Plan, at a minimum, shall include:

      (a)   quarterly and annual targets for the level of problem assets as a percentage of Tier 1(Core) capital plus allowance for loan and

      lease losses (ALLL);

 

            (b)   a description of the methods for reducing the Association's level of problem assets to the established targets; and

 

            (c)   all relevant assumptions and projections based on a best-case scenario, and a most probable case scenario, and documentation

      supporting such assumptions and projections.

10.  The Board's review of the Problem Asset Reduction Plan shall be documented in the Board meeting minutes. A copy of the Problem

Asset Reduction Plan shall be provided to the Regional Director within ten (10) days of adoption by the Board.

 

11.  Within sixty (60) days, the Association shall develop written specific workout plans for each problem asset or group of loans to

any one borrower or loan relationship of $500,000 or greater (Asset Workout Plans).

 

12.  Within thirty (30) days, the Association shall retain a qualified, full-time loan workout specialist, acceptable to the Regional

Director, whose sole responsibility shall be to implement the Asset Workout Plans (Loan Workout Officer). The Loan Workout

Officer shall be independent of the credit underwriting function at the Association.

 

13.  Within forty-five (45) days after the end of each quarter, beginning with the quarter ending December 31, 2010, the Association

shall submit a quarterly written asset status report (Quarterly Asset Report) to the Board. The Board's review of the Quarterly

Asset Report shall be documented in the Board meeting minutes. The Quarterly Asset Report shall include, at a minimum:

 

(a)    the current status of all Asset Workout Plans;

 

(b)    a comparison of problem assets to Tier 1(Core) capital plus ALLL and Total Risk-Based capital;

(c)    a comparison of problem assets at the current quarter end with the preceding quarter;

(d)    a breakdown of problem assets by type and risk factor, for example, residential, acquisition and development,

construction, land loans, location and origination source;

 (a)  include the appropriate use of Financial Accounting Standards Board (FASB) 114 impairment analysis; and

 (b)  provide for a quarterly independent third-party review and validation of the Association's ALLL methodology

 and sufficiency of the ALLL (Quarterly ALLL Report).

17.   Within sixty (60) days after the end of each quarter, beginning with the quarter ending December 31, 2010, the Board shall review the Quarterly ALLL Report, including, but not limited to, all qualitative factors considered in determining the adequacy of the Association's ALLL. The Board's review of the Quarterly ALLL Report shall be fully documented in the Board meeting minutes. Any deficiency in the ALLL shall be remedied by the Association in the quarter in which it is discovered and before the Association files its TFR with the OTS.

18.   Within sixty (60) days, the Association shall revise and implement policies and procedures for identifying, monitoring, and controlling risks associated with concentrations of commercial real estate credit (Credit Concentration Program) that addresses all corrective actions set forth in the 2010 ROE relating to concentrations of credit. The Credit Concentration Program shall comply with all applicable laws, regulations and regulatory guidance and shall:

 

19.           The Board's review of the Credit Concentration Program shall be documented in the Board meeting minutes. A copy of the Credit Concentration Program shall be provided to the Regional Director within ten (10) days of adoption by the Board.

 

20.          Within forty-five (45) days after the end of each quarter, beginning with the quarter ending December 31, 2010, the Board shall review the appropriateness of the Association's concentration limits given current conditions and the Association's compliance with its Credit Concentration Program including the written action plan to revise the current level of concentrations. The Board's review of the Association's Credit Concentration Program shall be documented in the Board meeting minutes.

 

 

27.   Calculation of time limitations for compliance with the terms of this Agreement run from the Effective Date and shall be based on calendar days, unless otherwise noted.

 

28.   All submissions to the OTS that are required by or contemplated by the Agreement shall be submitted within the specified timeframes.

 

29.      Except as otherwise provided herein, all submissions, requests, communications, consents or other documents relating to this Agreement shall be in writing and sent by first class U.S. mail (or by reputable overnight carrier, electronic facsimile transmission or hand delivery by messenger) addressed as follows:

30.    Nothing in this Agreement shall be construed as allowing the Association, its Board, officers or employees to violate any law, rule, or regulation.

33.   The laws of the United States of America shall govern the construction and validity of this Agreement.

34.   If any provision of this Agreement is ruled to be invalid, illegal, or unenforceable by the decision of any Court of competent jurisdiction, the validity, legality, and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby, unless the Regional Director in his or her sole discretion determines otherwise.

35.   All references to the OTS in this Agreement shall also mean any of the OTS's predecessors, successors, and assigns.

36.   The section and paragraph headings in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.

 

37.   The terms of this Agreement represent the final agreement of the parties with respect to the subject matters thereof, and constitute the sole agreement of the parties with respect to such subject matters.

38.   This Agreement is a "written agreement" entered into with an agency within the meaning and for the purposes of 12 U.S.C. § 1818.

39.   Each Director signing this Agreement attests that he or she voted in favor of a Board Resolution authorizing the consent of the Association to the issuance and execution of the Agreement. This Agreement may be executed in counterparts by the directors after approval of execution of the Agreement at a duly called board meeting. A copy of the Board Resolution

Paoli, Pennsylvania