Federal Deposit
Insurance Corporation

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   [¶10,454] In the Matter of Lyndonville Savings Bank and Trust Company, Lyndonville, Vermont, Docket No. FDIC-91-162b (2-13-92).

   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 management policies detrimental to the Bank; operating with inadequate diversification of risk; failing to provide adequate supervision over the Bank's affairs; operating with inadequate liquidity; operating with inadequate interest rate risk exposure; and operating with inadequate electronic data processing policies and controls.

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Risk Position—Reduce—Written Plan Required
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Appraisals—Written Policy Required
   [.7] Funds Management—Written Policy Required
   [.8] Electronic Data Processing—Correct Deficiencies
   [.9] Electronic Data Processing—Security—Written Policy Required
   [.10] Loans—Concentrations of Credit—Reduction Plan

In the Matter of

LYNDONVILLE SAVINGS BANK
AND TRUST COMPANY
LYNDONVILLE, VERMONT
(Insured State Nonmember Bank)
ORDER TO CEASE
AND DESIST
FDIC-91-162b

   The Federal Deposit Insurance Corporation ("FDIC") on June 18, 1991, issued to Lyndonville Savings Bank and Trust Company, Lyndonville, Vermont ("Bank") a NOTICE OF CHARGES AND OF HEARING ("NOTICE") under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1). The NOTICE charged the Bank with having engaged in unsafe or unsound banking practices.
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The Bank and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated February 12, 1992, whereby solely for the purpose of this proceeding and without admitting or denying any of the allegations in the NOTICE, 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. 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. § 1813(u), cease and desist from the following unsafe or unsound banking practices:
   (a) operating with an excessive volume of adversely classified assets;
   (b) engaging in hazardous lending;
   (c) engaging in management policies and practices which are detrimental to the Bank;
   (d) operating with inadequate diversification of risk;
   (e) failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices;
   (f) operating with inadequate liquidity;
   (g) operating with excessive interest rate risk exposure;
   (h) operating with inadequate electronic data processing policies and controls.
   IT IS FURTHER ORDERED that the Bank and its institution-affiliated parties take affirmative action as set forth below. 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 and its institution-affiliated parties will not be deemed to have engaged in any unsafe or unsound banking practice described in any of the above provisions, except to the extent the Bank is not in compliance with the following provisions:

   [.1] 1. (a) 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 and 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.

   [.2] (b) 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 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 and staff member 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 {{4-30-92 p.C-1957}}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.

   [.3] 2. (a) Within ten (10) days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" in the FDIC Report of Examination of the Bank as of 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.
   (b) 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 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 methodology used to determine the adjustments made.
   (c) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the Board of Directors of the Bank shall: (1) review the adequacy of the Bank's Reserve, (2) provide for an adequate Reserve, and (3) accurately report the Reserve in any such Report of Condition and Income. The minutes of the Board meeting at which such
{{4-30-92 p.C-1958}}review is undertaken shall indicate the results of the review is undertaken shall indicate the results of the review, including any increases in the Reserve, and the basis for determining the amount of allowance provided.

   [.4] 3. (a) Within ninety (90) days from the effective date of this ORDER, the Board of Directors 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 $100,000 which was classified "Substandard" in whole or in part, as of December 17, 1990. In developing such plan, the Bank shall, at a minimum:

   (i) review the financial position of each such borrower, including source 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.

   [.5] 4. The Bank shall not extend or renew, directly or indirectly, credit to, or for the benefit of, any borrower who or which has a loan of other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss" or "Substandard" and is uncollected, unless a majority of the Bank's Board of Directors first (1) determines that such extension or renewal is in the best interest of the Bank, (2) determines that the Bank has satisfied the requirements set out in paragraph 3 of this ORDER as to such borrower, and (3) approves such extension or renewal. A written record of the Board of Directors' determination and approval of any extension or renewal under the terms of this paragraph 4 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the Board of Directors.

   [.6] 5. Within ninety (90) days from the effective date of this ORDER, the Bank shall develop a written appraisal policy incorporating the provisions and requirements of Part 323 of FDIC's Rules and Regulations. These requirements include, but are not limited to, a written presentation of the appraisal, sufficient detail and depth to reflect the complexity of the real estate, and an acceptable valuation method that addresses the direct sales comparison, cost, or income approach to value. The written appraisal policy shall be submitted to the Regional Director or the Commissioner for review and comment. No sooner than thirty (30) days, but under no circumstances more than forty-five (45) days after such submission, the
{{4-30-92 p.C-1959}}Board of Directors shall approve the written appraisal policy, 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 appraisal policy 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 appraisal policies and/or any subsequent modification thereto.

   [.7] 6. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall develop a written funds management policy which shall include, at a minimum:

   (i) provisions for determining the Bank's liquidity needs and plans for insuring that such needs are met on an ongoing basis;
   (ii) specific plans to increase the Bank's temporary (liquid) investments to an adequate level;
   (iii) goals and strategies for managing and/or improving the Bank's interest rate risk exposure within established acceptable parameters;
   (iv) provisions for monitoring of the interest rate sensitivity of present investments and deposits to improve such liquidity position;
   (v) provisions for the establishment of an asset/liability management committee to review the Bank's position and ensure compliance with policy guidelines; and
   (vi) provisions for coordination of the Bank's loan, investment, operating, and budget and profit planning policies with the written funds management policy.

   [.8] 7. Within ninety (90) days from the effective date of this ORDER, the Bank shall formulate a written plan of action to correct the exceptions cited in the Electronic Data Processing Report of Examination dated December 17, 1990 as well as those exceptions outstanding from previous regulatory examinations and internal audits. 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 forty-five (45) days after such submission, the Board of Directors shall approve the written plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the board. 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, 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 plan and/or any subsequent modification thereto.

   [.9] 8. Within ninety (90) days from the date of this ORDER, the Bank shall formulate and/or update written policies for data security, microcomputers, disaster recovery contingency planning, and strategic plan- {{4-30-92 p.C-1960}}ning. At a minimum, these policies shall include the recommendations noted on pages 2-a through 2-a-2 of the Examination. The written policies 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 forty-five (45) days after such submission, the Board of Directors shall approve the written policies, taking into consideration any regulatory 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. The Bank, its directors, officers and employees shall follow the written policies and/or any subsequent modification thereto.

   [.10] 9. Within (60) days from the effective date of this ORDER, the Bank shall formulate and implement a plan to reduce all concentrations as noted on page 2-b of the Examination to less than twenty-five (25.0) percent of the Bank's Tier 1 capital.
   10. Within thirty (30) days from the effective date of this ORDER, 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. 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.
   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.
   Dated at Needham, Massachusetts this 13th day of February, 1992.
   Pursuant to delegated authority.