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FDIC Enforcement Decisions and Orders

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   [10,218] In the Matter of Dartmouth Bank, Manchester, New Hampshire, Docket No. FDIC-91-107b (4-10-91).

   Bank to cease and desist from operating with an excessive volume of adversely classified assets; operating with inadequate capital; operating with inadequate liquidity; engaging in practices which produce inadequate operating income and excessive loan losses; providing inadequate supervision and direction over the affairs of the Bank; and operating with insufficient loan documentation. (This order was terminated by order of the FDIC dated 10-17-91; see15,343.)

   [.1] Management—Qualifications
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Assets—Adversely Classified—Eliminate/Reduce
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   [.4] Capital—Increase/Maintain—Written Plan Required
   [.5] Loans—Risk Position—Reduce—Written Plan Required
   [.6] Loans—Extensions of Credit—Existing Borrowers—Limits
   [.7] Loans—Overdue—Accrual of Interest
   [.8] Liquidity Ratio—Written Plan Required
   [.9] Loan Policy—Review Required
   [.10] Profit Plan—Written Plan Required
   [.11] Dividends—Restricted
   [.12] Technical Exceptions—Eliminate/Correct
   [.13] Compliance—Progress Reports—Frequency

In the Matter of

DARTMOUTH BANK
MANCHESTER, NEW HAMPSHIRE
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Dartmouth Bank, Manchester, 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 violation of regulation 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 (the "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 March 28, 1991, whereby solely for the purpose of settling this proceeding and without admitting any allegations or implications of fact or existence of any unsafe or unsound practice, violation of regulation, or other ground for issuance of an order under section 8(b) of the Act, 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 a regulation. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   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:

       (a) operating with an excessive volume of adversely classified assets;
       (b) operating with inadequate capital for the kind and quality of assets held, in violation of Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325;
       (c) operating with inadequate liquidity;
       (d) engaging in practices which produce inadequate operating income and excessive loan losses;
       (e) failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices;
       (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.
   IT IS FURTHER ORDERED that the bank and its institution-affiliated parties take the following affirmative action (to the extent such actions have not already been completed by the Bank prior to the issuance of this ORDER). 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 and its institution affiliated parties will not be deemed to have engaged in any unsafe or unsound banking practice or violation of law and/or regulation described in provisions (a) through (f) above, except to the extent the Bank is not in compliance with the following provisions:
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   [.1] 1. (a) Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall have, and thereafter continue to retain, management with proven ability and experience in managing a bank of comparable size and in upgrading a low quality loan portfolio. Management 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. As used in this paragraph, "restore" includes improvement in quality if necessary to comply with this requirement.

   [.2] (b) Toward this end within ninety (90) days from the effective date of this ORDER, the Board of Directors shall develop a written analysis and assessment of the Bank's executive officers (as that term is defined in Federal Reserve Board Regulation), 12 C.F.R. § 215.1 et seq.) and staffing needs ("management plan"), which shall include, at a minimum:
       (i) identification of both the type and number of executive 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 executive officers;
       (iii) evaluation of each executive officer 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 Directors determines are necessary to fill Bank executive officer positions consistent with the Board's analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
   (c) The written management plan shall be submitted to the Regional Director and the Bank Commissioner of the State of New Hampshire ("Commissioner") for review and comment. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the written management plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the written management 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 implement and follow the written management plan and/ or any subsequent modification thereto approved by the Board of Directors, which approval shall be recorded in the minutes of the Board of Directors meeting.
   (d) The written management plan shall also include the requirement that the Board of Directors of the Bank, or a committee thereof consisting of not less than a majority of Board members who are not officers or employees of 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.
   (e) The Bank's Board of Directors shall meet at least monthly. The Board shall prepare in advance and shall follow a detailed written agenda at each meeting, which shall include consideration of actions of any committees. A chronological file of all written agendas shall be maintained. Notwithstanding the foregoing, the {{6-30-91 p.C-977}} Board shall not be precluded from considering matters other than those contained in the agenda. Detailed written minutes of all Board meetings shall be maintained and recorded on a timely basis.

   [.3] 3. Within thirty (30) days from the effective date of this ORDER, the Bank: (1) shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" in the FDIC Report of Examination dated March 23, 1990 ("Examination")' and (2) shall either (A) eliminate from its books by charge-off or collection, or (B) if the asset is an extension of credit or lease, increase its allowance for loan and lease losses ("Reserve") by an amount equal to fifty (50.0) percent of those assets or portions of assets classified "Doubtful" in the 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 to qualified third party borrowers, does not constitute "collection" or "elimination" for the purpose of this paragraph.

   [.4] 3. (a) (i) On or before December 31, 1992, the Bank shall have Tier 1 capital at or in excess of six (6.0) 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 as calculated herein while 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 within ninety (90) 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.
   (ii) For purposes of this ORDER, the term "Tier 1 capital" means the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus), and minority interests in consolidated subsidiaries, minus all intangible assets other than mortgage servicing rights (to the extent that such rights are allowable as capital in Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, as existing on the date of the issuance of the ORDER and as hereinafter amended), off balance sheet items classified loss, liabilities not shown on the Bank's books, estimated losses on contingent liabilities, differences in accounts which represent shortages, any other losses identified subsequent to the Examination which have either not been recognized on the Bank's books or have not been collected or otherwise settled, and investments in securities subsidiaries subject to 12 C.F.R. § 337.4.
   (iii) For purposes of this ORDER, the term "total assets" means the average of total assets required to be included in the Bank's "Reports of Condition and Income," as this report may from time to time be revised, as of the most recent report date (and after making any necessary subsidiary adjustments as described in 12 C.F.R. § 325.5(d) and (e) of the FDIC's Rules and Regulations in effect as of the date of the issuance of this ORDER), minus intangible assets other than mortgage servicing rights (to the extent that such rights are allowable as capital in Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, as existing on the date of the issuance of the ORDER and as hereinafter amended) and any other assets that are deducted in determining Tier 1 capital.
   (b) In calculating the Bank's Tier 1 leverage capital ratio under paragraph 3(a) initially, the Bank shall first comply fully with paragraph 2 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 for the Reports of Condition and Income ("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 direct contribution of cash by the directors of the Bank;
       (iii) the collection of all or part of assets classified "Loss" within the Ex-
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    aminations 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 Directors' 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;
       (iv) the collection in cash of assets previously charged off;
       (v) any combination of the above means; or
       (vi) any other means acceptable to the Regional Director and the Commissioner.
   (d) If, after having achieved the Tier 1 leverage capital the ratio specified in paragraph 3(a)(i), such ratio declines below six (6.0) percent, the Bank, within thirty (30) days after the date on which said ratio so declined, shall submit a written plan to the Regional Director and the Commissioner for increasing such ratio up to or in excess of six (6.0) percent within sixty (60) days after the written plan is implemented. Thereafter, the Bank shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level as calculated herein while this ORDER is in effect. Upon approval by the Regional Director and the Commissioner, the Bank shall immediately implement the written plan.
   (e) In addition to the requirements of paragraphs 3(a)-(d), the Bank shall comply with the FDIC's Statement of Policy on Risk-Based Capital found in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, App. A.
   (f) If all or part of any increase in capital made by the Bank in order to meet the requirements of this paragraph 3 involves an offering, other than an offering deemed not to be a public securities offering pursuant to 17 C.F.R. § 230.506 or as hereafter amended, 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, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the sale of the securities, and, in any event not less than twenty (20) days prior to the 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.
   (g) In complying with the provisions of paragraph 3(f) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank stock, written notice of any planned or existing development or other change which is materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph 3(g) shall be furnished within ten (10) calendar days from the date such material development or change was planned or occurred, whichever is earlier, to every purchaser and/or subscriber of Bank stock who received or was tendered the information contained in the Bank's original offering materials.
   (h) The Bank's Board of Directors shall maintain in its minutes a written record of all actions taken by the Bank to comply with the capital requirements of paragraphs 3(a) through 3(g) of this ORDER, including, at a minimum, any action to increase its Tier 1 capital by each of the methods specified in paragraphs 3(c)(i) through 3(c)(vi) of this ORDER.

   [.5] 5. (a) Within ninety (90) days from the effective date of this ORDER, the Bank's Board of Directors or the Special Assets Committee (a majority of the members of which shall not be employees of the Bank) shall be responsible for developing, with the assistance of Bank management, 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 $300,000 which was classified "Substandard" or "Doubtful," in whole or in part, as of March 23, 1990. In developing such plan, the Bank shall, at a minimum:

       (i) review the financial position of each such borrower, including source
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    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.
Based upon such review and evaluation, the written plan of action shall also: (A) establish a plan by which the Bank shall reduce the aggregate dollar volume of "Substandard" or "Doubtful" classifications to not more than $100,000,000 within one hundred and eighty (180) days from the effective date of this ORDER, and $50,000,000 within two hundred and forty (240) days from the effective date of this ORDER; and (B) provide for the submission of written monthly progress reports to the Bank's Board of Directors or Special Assets Committee for review and notation in the Board or such Committee's minutes. Such reports shall be in the form of Exhibit A or any other form so long as such other form contains the information required by Exhibit A.
   (b) Within ninety (90) days from the effective date of this ORDER, the Bank's Board of Directors of its Special Assets Committee shall be responsible for developing, with the assistance of Bank management, a written plan of action to reduce the volume of other real estate owned by the Bank as of March 23, 1990. In developing such plan, the Bank shall: (A) establish a plan by which the Bank shall reduce the aggregate dollar volume of other real estate owned to not more than $15,000,000 within one hundred and eighty (180) days from the effective date of this ORDER, and to not more than $7,000,000 within two hundred and forty (240) days from the effective date of this ORDER; and (B) provide for the submission of written monthly progress reports to the Bank's Board of Directors for review and notation in the Board minutes.
   (c) As used in subparagraphs 4(a) and 4(b), "reduce" means to (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC and the State Banking Department. Payment of loans with the proceeds of the other loans made by the Bank, other than to qualified third party borrowers, will not constitute "reduction" or "collection" for purposes of this ORDER.
   (d) The written plans of action described by paragraph 4(a) and 4(b) shall be submitted to the Regional Director and the Commissioner for review and comment. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors or the Special Assets Committee shall approve the written plan of action, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors or such Committee. Subsequent modifications to the written 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 or the Special Assets Committee, and such approval shall be recorded in the minutes of the Board of Directors or such Committee. The Bank, its directors, officers and employees shall follow the written plan of action and/or any subsequent modification.
   (e) The requirements of subparagraph 4(a) and 4(b) are not to be construed as standards for future operations. In addition, the Bank shall eventually reduce the total of all adversely classified assets.

   [.6] 5. The Bank shall not extend or renew, directly or indirectly, credit to, or for the benefit of, any borrower who 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 Directors or its Special Assets Committee first (1) determines that such advance 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 advance. A written record of the Board or such Committee's determination and approval of any advance under the terms of this paragraph 5 shall be maintained in the credit file of the affected {{6-30-91 p.C-980}} borrower(s) as well as the minutes of the Board of Directors or such Committee. The limitations imposed by this paragraph 5 shall not apply to legally binding credit commitments entered into by the Bank prior to the issuance of this ORDER.

   [.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, "well secured" and "in the process of collection" shall have the same meaning as those terms have in the prevailing Instructions in effect as of the effective date of the ORDER. 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 submit to the Regional Director and the Commissioner a written plan detailing the specific measures to improve the Bank's liquidity Level. The plan shall address, at a minimum; (A) daily liquidity needs, (B) emergency funding sources, and (C) the means by which the liquidity ratio will be increased to ten (10) percent by June 30, 1991.
   (b) The computation of the liquidity ratio shall be determined in accordance with procedures outlined in the "Liquidity and Funds Management" schedule, page 5-a of the FDIC Report of Examination.
   (c) The means addressed in subparagraph 7(a) to obtain such a posture should be firm and attainable. The ratios targeted should not be construed as a standard for future operation.

   [.9] 8. Within ninety (90) days from the effective date of this ORDER, the Bank shall review the Bank's written loan policy, including all lending, collection, loan review, loan workout, and appraisal guidelines, and shall record the results of such review in the Board of Directors' minutes. Thereafter, the Bank, its directors, officers, and employees shall follow the written loan policy.

   [.10] 9. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall develop a written profit plan consisting 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 plan shall be submitted to the Regional Director and the Commissioner for review and comment. No sooner than thirty (30) days, but under no circumstances more than sixty (60) 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 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.

   [.11] 10. The bank shall not declare or pay any dividends unless such declaration and payment is:

       (i) in accordance with applicable State and Federal laws and regulations;
       (ii) approved in advance by the Board of Directors of the Bank; and
       (iii) approved in advance, in writing, by the Regional Director and the Commissioner, which approval shall not be unreasonably withheld.

   [.12] 11. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall: (i) diligently work to correct the technical exceptions on loans noted on pages 2-d of the Examination; or (ii) if {{6-30-91 p.C-981}}correction of an exception is not feasible, report on the status of such exception.
   (b) Within ninety (90) days from the effective date of this ORDER, the Bank shall: (i) diligently work to correct the cited deficiencies in the loans listed for "Special Mention" on pages 2-b of the Examination; or (ii) if correction of a deficiency is not feasible, report on the status of such deficiency.

   [.13] 12. Within thirty (30) days from the end of the calendar quarter following the effective date of this ORDER, and, thereafter, within thirty (30) days from the end of each subsequent 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 achieve and maintain 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 Directors of the Bank and made a part of the minutes of the Board meeting.
   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.
   This ORDER supersedes and replaces the Memorandum of Understanding dated January 9, 1990, among the Board of Directors, the FDIC and the Commissioner, which is of no further force and effect.
   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 10th day of April, 1991.

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