Federal Deposit
Insurance Corporation

{{7-31-92 p.C-1300}}    [¶10,296] In the Matter of Shore Bank and Trust Company, Lynn, Massachusetts, Docket No. FDIC-91-244b (8-13-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with excessive volumes of adversely classified assets; following hazardous lending and lax collection practices; operating with inadequate capital; operating in violation of applicable laws or regulations; operating with management whose policies are detrimental to the Bank; operating with inadequate loan documentation; engaging in practices which produce inadequate operating income; failing to provide adequate supervision over the Bank's affairs; operating with inadequate allowance for loan and lease losses; operating with inadequate liquidity; operating without a proper internal audit program; and permitting development of concentrations of credit. (This order was terminated by order of the FDIC dated 5-13-92; see ¶15,448.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Board of Directors—Election—Outside Directors Added
   [.4] Loan Loss Reserve—Increase/Maintain
   [.5] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.6] Loans—Risk Position—Reduce—Written Plan Required
   [.7] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.8] Loans—Overdue—Accrual of Interest
   [.9] Profit Plan—Minimum Requirements
   [.10] Funds Management—Written Policy Required
   [.11] Audit—Internal—Written Procedures Required
   [.12] Dividends—Restricted
{{10-31-91 p.C-1301}}
   [.13] Liquidity Ratio—Written Plan Required
   [.14] Shareholders—Disclosure—Cease and Desist Order
   [.15] Technical Exceptions—Correct/Eliminate
   [.16] Violations of Law—Eliminate/Correct
   [.17] Compliance Reports—Frequency

In the Matter of

SHORE BANK AND TRUST COMPANY
LYNN, MASSACHUSETTS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Shore Bank and Trust Company, Lynn, 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 August 7, 1991, whereby solely for the purpose of this proceeding and without admitting or denying any allegations or implications of fact or the existence of 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, accepted 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. section 1813(u), cease and desist from the following unsafe or unsound banking practices and violation of regulation:
   (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 violation of Part 350 of FDIC's Rules and Regulations, 12 C.F.R. Part 350;
   (e) engaging in certain management policies and practices which 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 violation of Part 350 of FDIC's Rules and Regulations, 12 C.F.R. Part 350;
   (i) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   (j) operating with inadequate liquidity;
   (k) operating without a proper internal audit program; and
   (l) permitting the development of concentrations of credit.
   IT IS FURTHER ORDERED that the Bank and its institution-affiliated parties take affirmative action as set forth below. Solely for purposes of enforcement of this ORDER, the Bank and its institution-affiliated parties shall not be deemed to be in violation of this ORDER, except to the extent that they are in violation of the following provisions:

   [.1] 1. (a) Within one hundred twenty {{10-31-91 p.C-1302}}(120) days from the effective date of this ORDER, the Bank shall have and retain qualified management. Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. At a minimum, such management shall include a President and Chief Executive Officer, who in view of the Bank's current condition, has the ability to upgrade a low quality loan portfolio, and ensure that cited deficiencies in the FDIC's Report of Examination dated December 17, 1990 are corrected. Additionally, management shall include a financial officer with commensurate abilities to handle the Bank's financial affairs. Such individuals 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 accomplish the following:

   (i) compliance with the requirements of this ORDER,
   (ii) operation of the Bank in a safe and sound manner,
   (iii) compliance with applicable laws and regulations, and
   (iv) restoration of all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness and liquidity.

   [.2] (b) Toward the end of having the retaining qualified management, within ninety (90) days from the effective date of this ORDER, the Board of Directors shall develop, with such assistance from the Bank's management or any outside consultants as the Board may deem appropriate, 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 at the level of vice president and above, and in particular the President and Chief Executive officer, to determine whether these individuals posses 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 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.

[.4] 2. (a) Within ten (10) days from the effective date of this ORDER, the Bank shall have increased its allowance for loan and lease losses ("Reserve") existing as of December 31, 1990 by $2,600,000 at a minimum.
   (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 Report of Examination dated December 17, 1990 ("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.
   (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 Directors, with the assistance of management, 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 non-accrual 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 Directors and adjustments to the Reserve will be made accordingly. Details of these reviews will be incorporated into the minutes of the Board of Directors, including the factors considered and/ or methodology used to determine the adjustments made.
   (d) Reports of Condition and Income required to be submitted by the bank as of
{{10-31-91 p.C-1304}}each Report date, as that term is used in the Instructions, between and including December 31, 1990 and the effective date of this ORDER, shall, at a minimum, reflect a Reserve maintained in accordance with the Instructions. If necessary to comply with this paragraph 2(d), the Bank shall file amended Reports of Condition and Income within ten (10) days from the effective date of this ORDER.

[.5] 3. (a) (i) The Bank and its Board of Directors will take all steps necessary to increase the Bank's Tier 1 Capital to the levels and within the time frames specified as follows: December 31, 1991, Tier 1 capital at or in excess of three (3.0) percent of the Bank's total assets ("Tier 1 leverage capital ratio"), and the Bank shall thereafter maintain its Tier 1 leverage capital ratio at or above that level for the following six calendar month period; June 30, 1992, a Tier 1 leverage capital ratio at or in excess of three and one-half (3.5) percent, and the Bank shall thereafter maintain its Tier 1 leverage capital ratio at or above that level for the following six calendar month period; December 31, 1992, a Tier 1 leverage capital ratio at or in excess of four (4.0) percent, and the bank shall thereafter maintain its Tier 1 leverage capital ratio at or above that level for the following six calendar month period; June 30, 1993, a Tier 1 leverage capital ratio at or in excess of five (5.0) percent, and the Bank shall thereafter maintain its Tier 1 leverage capital ratio at or above that level for the following six calendar month period; December 31, 1993, a Tier 1 leverage capital ratio at or in excess of six (6.0) percent. Thereafter, the Bank shall continue to maintain its Tier 1 leverage capital ratio at or in excess of six (6.0) percent while this ORDER is in effect. Furthermore, at no time while this ORDER is in effect shall the Tier 1 leverage capital ratio decline below two (2.0) percent. Toward this end, 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.
   (ii) 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 retention of earnings;
   (ii) the sale of new offerings of common stock or noncumulative perpetual preferred stock;
   (iii) the collection of all or part of assets classified: (A) "Loss" in the Examination, without loss or liability to the Bank, or (B) "Doubtful" in the Examination, without further or additional loss or liability to the Bank, provided any collection on such assets shall first be applied to that portion of the asset which was not charged off pursuant to paragraph 2 of this ORDER. Reductions to loans and leases classified "Loss" and "Doubtful" shall first be credited to the remaining balance outstanding with regard to such loans and leases and the remainder, if any, then to the Reserve and, if the Board of Directors' review of the adequacy of the Reserve required by paragraph 2 of this ORDER indicates that the 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
{{10-31-91 p.C-1305}}the Regional Director and the Commissioner.

[.6] 4. (a) Within thirty (30) days from the effective date of this ORDER, the Board of Directors, with the assistance of management, 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 $300,000, and each parcel of other real estate owned with book value in excess of $100,000, which was classified "Substandard" or "Doubtful," in whole or in part, in the 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 evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position; and,
   (ii) in the case of other real estate owned, evaluate the property and provide cost/benefit analyses of holding property versus current liquidation value.

   [.7] 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 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, if applicable, and (3) approves such advance. A written record of the Board of Directors' determination and approval of any advance under the terms of this paragraph 5 shall be maintained in the credit file of the affected borrowers as well as the minutes of the Board of Directors. Notwithstanding the foregoing provisions, this ORDER shall not require such approvals of the Board of Directors for extensions of credit made pursuant to legally binding contractual commitments entered into by the Bank prior to the date this ORDER is signed by the Regional Director.

   [.8] 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 6, "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 reserve on its books all previously accrued but uncollected interest on any loan that has ceased to accrue interest pursuant to this provision.

[.9] 7. (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.

[.10] 7. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall develop a written funds management policy which shall include, at a minimum:

   (i) the Bank's liquidity needs and plans for ensuring that such needs are met on an ongoing basis;
   (ii) goals and strategies for managing and/or improving the Bank's interest rate risk exposure;
   (iii) monitoring of the interest rate sensitivity of present investments and deposits and projections of the types of investments and deposits to improve such liquidity position; and
   (iv) coordination of the Bank's loan, investment, operating, and budget and profit planning policies with the written funds management policy.

   [.11] 8. Within sixty (60) days from the effective date of this ORDER, the Bank shall develop an internal audit program that establishes procedures to protect the integrity of the Bank's operational and accounting systems. The internal audit program 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 internal audit program taking into consideration any comments received from the Regional Director and/or the Commissioner within such thirty-day period, and such approval shall be recorded in the minutes of the Board of Directors.

   [.12] 9. The Bank shall not pay or declare any dividends without the prior written consent of the Regional Director and the Commissioner.

[.13] 10. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner, with said plan reflecting the means and timing by which the Bank shall achieve and maintain a "Liquidity Ratio" of at least fifteen (15.0) percent. The method for computing and measuring the "Liquidity Ratio" is contained in the schedule "Liquidity Ratio and Dependency Ratio", page 5-a of the Examination.
{{10-31-91 p.C-1308}}
   (b) Within ninety (90) days from the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner, with said plan reflecting the means and timing by which the Bank shall achieve and maintain a ratio that restricts reliance upon volatile liabilities to fund long term earning assets to less than ten (10.0) percent ("Dependence Ratio"). The method for computing the "Dependence Ratio" is contained in the schedule "Liquidity Ratio and Dependency Ratio", page 5-a of the Examination. Compliance with the requirements of this paragraph 10 will not estop, bar or prevent FDIC or the Office of the Commissioner from requiring additional corrective action with respect to the Bank's liquidity as either or both of them may deem appropriate from time to time.

   [.14] 11. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (1) in conjunction with the Bank's next shareholder communication, and also (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Section, Washington, D.C. 20429, for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.

[.15] 12. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall correct the remediable technical exceptions on loans noted on pages 2-d and 2-d-1 of the Examination.
   (b) Within (60) days from the effective date of this ORDER, the Bank shall formulate and implement a plan to reduce the loan concentration as noted on page 2-b of the Examination to less than twenty-five (25.0) percent of the Bank's total equity capital and its Reserve.
   (c) Within (60) days from the effective date of this ORDER, the Bank shall correct the remediable cited deficiencies in the loans listed for "Special Mention" on page 2-c of the Examination.

   [.16] 13. Within sixty (60) days from the effective date of this ORDER, the Bank shall have eliminated and/or corrected all violations of Part 350 of FDIC's Rules and Regulations, 12 C.F.R. Part 350, committed by the Bank as described on page 6-a of the Examination.

   [.17] 14. Within thirty (30) days from the last day of the month in which this ORDER becomes effective and, thereafter, within thirty (30) 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. These written progress reports shall include copies of the most recent criticized asset reports as described in paragraph 4 of this ORDER. In addition, the Bank shall furnish such other 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 of Banks of the Commonwealth of Massachusetts.
   The provisions of this ORDER shall remain effective and enforcement 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.
   Dated at Needham, Massachusetts this 13th day of August, 1991.
   Pursuant to delegated authority.