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{{11-30-91 p.C-654}}
   [10,135] In the Matter of Hillsborough Bank & Trust Company, Milford, New Hampshire, Docket No. FDIC-90-245b (11-29-90).

   Bank ordered to cease and desist from operating with inadequate primary capital; operating with an excessive volume of adversely classified assets; operating with inadequate liquidity; failing to improve Bank's earnings; violating federal and state laws and regulations; failing to maintain an adequate loan loss reserve; and operating with inadequate investment/funds management policies. (This order was terminated by order of the FDIC dated 9-10-91; see15,323.)
{{4-30-91 p.C-655}}
   [.1] Management—Qualifications—Review
   [.2] Primary Capital—Increase—Methods
   [.3] Capital Plan—Requirements—Methods
   [.4] Loans—Adversely Classified—Eliminate/Reduce—Written Plan
   [.5] Loans—Existing Borrowers—Curtail
   [.6] Funds Management and Liquidity—Written Policy—Minimum Requirements
   [.7] Profit Plan—Minimum Requirements—Review
   [.8] Violations of Law—Eliminate/Correct
   [.9] Dividends—Restricted
   [.10] Loan Valuation Reserve—Increase/Maintain—Review
   [.11] Loan Policy—Concentrations of Credit—Revise
   [.12] Audit—Written Policy Required
   [.13] Compliance—Reports—Frequency

In the Matter of

HILLSBOROUGH BANK & TRUST
COMPANY

MILFORD, NEW HAMPSHIRE
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Hillsborough Bank & Trust Company, Milford, New Hampshire, ("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 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 November 15, 1990, whereby solely for the purpose of settling this proceeding and without admitting or denying any unsafe or unsound banking practices, facts asserted or implied herein, or violations of law and/or regulation, 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, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe or unsound banking practices and violations of law and/or regulations:
   (a) operating with inadequate primary capital;
   (b) operating with an excessive volume of adversely classified assets;
   (c) operating with inadequate liquidity;
   (d) failing to take adequate steps to improve the Bank's earnings;
   (e) violating section 325.3(a) of the FDIC's Rules and Regulations, 12 C.F.R. § 325.3(a), section 215.4(d) of Federal Reserve Board Regulation O, 12 C.F.R. § 215.4(d), and sections 384:3 and 384:7 of the New Hampshire Revised Statutes Annotated, N.H. Rev. Stat. Ann. §§ 384:3 and 384:7, all as described in the FDIC Report of Examination of the Bank as of February 23, 1990;
   (f) failing to take adequate steps to establish an adequate loan loss reserve for the volume, kind and quality of loans held;
   (g) operating with inadequate investment/funds management policies.
   IT IS FURTHER ORDERED that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the {{4-30-91 p.C-656}}affairs of the Bank, take the following affirmative action. However, 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 any of the above provisions as long as the Bank is in compliance with the following provisions:

   [.1] 1. The Board of Directors of the Bank shall provide adequate supervision and direction over operation management and the affairs of the Bank to prevent unsafe and unsound practices, and violations of law or regulation. Toward this end, during the life of this ORDER, the Bank shall have and retain qualified management. Within sixty (60) days from the effective date of this ORDER, the Board of Directors shall conduct a study to reassess the qualifications of senior management, and shall send to the Regional Director of the FDIC's Boston Regional Office ("Regional Director") and the Bank Commissioner of the State of New Hampshire Banking Department ("Commissioner") the written findings and conclusions of its management review along with a written description of any management changes or realignment of duties that may be proposed as a result of the findings. The review shall focus on an assessment of the duties performed by each senior officer and the ability of that officer to perform competently his or her assigned duties. The qualifications of management shall be assessed on its conduct with respect to:
   (a) compliance with the requirements of this ORDER;
   (b) operation of the Bank in a safe and sound manner;
   (c) compliance with applicable laws and regulations; and
   (d) maintenance of all aspects of the Bank in a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness and liquidity.

   [.2] 2. (a) On or before the effective date of this ORDER, the Bank shall increase primary capital by a cash infusion of no less than $2,000,000 or by converting its two outstanding subordinated capital notes dated August 19, 1988 and June 29, 1989 for $1,500,000 and $500,000, respectively, to perpetual preferred stock that qualifies as primary capital for purposes of section 325.3 of the FDIC's Rules and Regulations, 12 C.F.R. § 325.3.

   [.3] (b) Within ninety (90) days from the effective date of this ORDER, the Bank shall submit a Capital Plan to the Regional Director and the Commissioner for approval. The Capital Plan shall address the means and timing to increase the Bank's primary capital to an adequate level.
   (c) Any increase in primary capital necessary to meet the requirements of paragraph 2(b) of this ORDER may be accomplished by the following:

       (i) the sale of common stock; or
       (ii) the sale of perpetual preferred stock; or
       (iii) the direct contribution of cash by the Board of Directors and/or shareholders of the Bank; or
       (iv) the collection of assets previously charged off; or
       (v) the reduction of the "Loss" assets specified in paragraph 3 of this ORDER (other than through the payment of loans with the proceeds of other loans by the Bank) without loss or liability to the Bank; or
       (vi) any other means acceptable to the Regional Director and the Commissioner; or
       (vii) any combination of the above means.
   (d) If all or part of the increase in primary capital required by subparagraph 2(a) of this ORDER is accomplished by the sale of new securities, the Bank's Board of Directors shall forthwith take all necessary steps to adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and of this ORDER as well as the circumstances giving rise to the offering, any any other material disclosures necessary to comply with State and Federal securities laws. Prior to the sale of the securities and, in any event not less than twenty (20) days prior to the {{4-30-91 p.C-657}}dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, Washington, D.C. 20429, for review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (e) If all or part of the increase in primary capital is provided by the sale of preferred stock, then all terms and conditions of the issue, including but not limited to those terms and conditions relative to interest rate and convertibility factor, shall be presented to the Regional Director and the Commissioner for prior approval.
   (f) In complying with the provisions of subparagraph 2(b) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities written notice of any planned or existing development or other changes which are materially different from information reflected in any offering materials used in connection with the sale of the Bank's securities. The written notice required by this subparagraph shall be furnished within ten (10) days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.
   (g) For the purposes of this ORDER, the terms "primary capital," "total assets," and "total capital" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations as currently in effect.

   [.4] 3. (a) Within ten (10) days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off, collection, or other proper entries, all assets classified "Loss" and one-half of the amount of assets classified "Doubtful" as of February 23, 1990, that have not been previously collected or charged off. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purposes of this subparagraph (a).

   (b) Within ninety (90) days from the effective date of this ORDER, the Bank shall submit a written plan to reduce the assets classified "Substandard" and the remaining assets classified "Doubtful" as of February 23, 1990 that have not previously been collected or charged off. Such written plan shall include, at a minimum, a description of the debt, nature of the problem, collateral protection, and management's intentions to collect the debt.
   (c) As used in paragraph 3(b) of this ORDER, the word "reduce" means:

       (i) to collect, except that payment of loans with the proceeds of other loans by the Bank to the same borrower(s) is not considered collection; or
       (ii) to charge off; or
       (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification.
   [.5] 4. The Bank shall not knowingly extend or renew, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, "Loss," "Doubtful" or "Substandard" and is uncollected unless the prior approval of a majority of the Bank's Board of Directors is obtained.

   [.6] 5. Within sixty (60) days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner a formal funds management policy detailing specific measures to improve the Bank's liquidity and lessen reliance on volatile liabilities. The plan shall address daily liquidity needs in addition to emergency funding sources, and shall detail the means by which the liquidity ratio will be increased to 10% by December 31, 1990. The policy shall also address the use of volatile funds to support long term assets and detail the means by which the volatile liability dependency ratio will be reduced to 15% by December 31, 1990. The policy shall also formally establish parameters for the matching of rate sensitive assets to rate sensitive liabilities over six (6), twelve (12) and twenty-four (24) month time horizons. The measures proposed and the availability of and commitments for funding liabilities should be firm and attainable. The computation of the liquidity ratio shall be determined in accordance with the procedures {{4-30-91 p.C-658}}outlined in the "Liquidity and Funds Management" Schedule, page 5-a of the standard FDIC Report of Examination form. The 10% ratio is not to be construed as a standard for acceptable future performance.

   [.7] 6. (a) Within ninety (90) 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 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; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (b) The written profit plan shall be submitted to the Regional Director and the Commissioner for review and comment. No more than thirty (30) days after such submission, the Board of Directors shall approve the written profit plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent substantive modifications to the written profit plan may be made only after giving the Regional Director and the Commissioner written notice of the proposed modification, and after consideration of any responsive comments submitted by 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 Directors, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification thereto.

   [.8] 7. Within sixty (60) days from the effective date of this ORDER, the Bank shall take all reasonable and appropriate action to eliminate and/or correct all apparent violations of section 325.3(a) of the FDIC's Rules and Regulations, 12 C.F.R. § 325.3(a), sections 384:3 and 384:7 of the New Hampshire Revised Statutes Annotated, N.H. Rev. Stat. Ann. §§ 384:3 and 384:7. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.9] 8. The Bank shall not declare or pay dividends in any amount except under the following conditions:

       (a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
       (b) such declaration and payment of dividends shall be approved in advance by the Bank's Board of Directors; and
       (c) such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director and the Commissioner.
   [.10] 9. Within thirty (30) days from the effective date of this ORDER and after complying with paragraph 3 of this ORDER, the Bank's Board of Directors shall increase the general valuation reserve for loans by $900,000 over the level existing at February 23, 1990, at a minimum, and thereafter require that the reserve be maintained at an adequate level by periodic charges to operating revenue. Within sixty (60) days from the effective date of this ORDER, the Bank's Board of Directors shall establish a comprehensive policy for determining the adequacy of the valuation reserve. For the purpose of this determination, the adequacy of the reserve shall be determined after the charge-off of all loans classified "Loss." 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, concentration 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 minutes of the Board of Directors' meeting at which such review is undertaken shall indicate the result of the review. Said review should be completed at least ten (10) days prior to the end of each quarter in order that any loss provisions determined to be appropriate by the Board of {{2-28-91 p.C-659}}Directors with respect to the valuation reserve may be properly reported in the quarterly Reports of Condition and Income.

   [.11] 10. Within sixty (60) days from the effective date of this ORDER, the Bank shall revise its existing lending policy to address a reasonable level of concentrations of credit in relation to total equity capital and reserves. Concentrations, in this context, are meant to include both customer lending relationships and industry risk exposure.

   [.12] 11. Within sixty (60) days from the effective date of this ORDER, the Bank shall adopt a written audit policy that will specifically address the needs of this institution. The policy shall address the independence of the audit and provide for direct reporting to the Board of Directors or a committee thereof.

   [.13] 12. Within sixty (60) days from the effective date of this ORDER, and within thirty (30) days from the end of each calendar quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports shall include a copy of the Bank's Report of Condition and the Bank's Report of Income. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner have released the Bank, in writing, from making further reports.
   The provisions of this ORDER shall be binding upon 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), and in accordance therewith.
   This ORDER shall become effective ten (10) days from the date of its issuance.
   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 Needham, Massachusetts, this 29th day of November, 1990.

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