Federal Deposit
Insurance Corporation

{{10-31-00 p.C-2482.16}}
   [¶10,583] In the Matter of Danvers Savings Bank, Danvers, Massachusetts, Docket No. FDIC-92-202b (7-15-92).

   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 inadequate capital; operating with management policies detrimental to the Bank; 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 proper internal routine and controls; operating with excessive investment in real estate development projects; and operating with excessive concentrations of credit. (This order was terminated by order of the FDIC dated 10-24-95. See ¶ 16,048.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.5] Loans—Risk Position—Reduce—Written Plans Required
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Loans—Overdue—Accrual of Interest
   [.8] Loan Policy—Written Revision
   [.9] Profit Plan—Minimum Requirements
   [.10] Funds Management—Written Policy Required
   [.11] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.12] Real Estate—Appraisal Policy Required
   [.13] Loans—Concentrations of Credit—Reduction Plan
   [.14] Compliance Reports—Frequency

In the Matter of

DANVERS SAVINGS BANK
DANVERS, MASSACHUSETTS
(Insured State Nonmember Bank)
ORDER TO CEASE
AND DESIST
FDIC-92-202b
   Danvers Savings Bank, Danvers, Massachusetts, ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices 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 June 19, 1992, whereby solely for the purpose of settling this pro-{{10-31-00 p.C-2482.17}}ceeding and without admitting any allegations or implications of fact or the existence of any unsafe or unsound banking practices, 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, including operating with an excessive volume of adversely classified loans and real estate joint ventures;
   (b) engaging in hazardous lending practices;
   (c) operating with inadequate Tier I leverage capital for the kind and quality of assets held;
   (d) engaging in management policies and practices which are detrimental to the Bank;
   (e) engaging in practices which produce inadequate operating income and excessive loan losses;
   (f) failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices;
   (g) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   (h) operating with inadequate liquidity;
   (i) operating without proper internal routine and controls;
   (j) operating with excessive investment in real estate development projects; and,
   (k) operating with excessive concentrations of credit.
   IT IS FURTHER ORDERED that the Bank and its institution-affiliated parties, take affirmative action as set forth below. Solely for the purposes of enforcement of this ORDER, the Bank and its institution-affiliated parties shall not be deemed to be in violation of paragraphs (a) through (k) above, except to the extent that they are in violation of the following:

[.1] 1. (a) The Bank shall continue to have and retain qualified management. At a minimum, such management will include a President and Senior Lending Officer. The President must have proven abilities in managing a bank of comparable size and experience in dealing with and upgrading a low quality loan portfolio. The Senior Lending Officer should have an appropriate level of lending, collection and loan supervision experience to manage the type and quality of the Bank's loans as well as the ability to upgrade a low quality portfolio. Such individuals shall be provided with the necessary written authority to implement the provisions of this ORDER. Such management shall also provide for an adequate audit function. The qualifications of management shall be assessed on its ability to take effective ac- {{9-30-92 p.C-2483}}tion toward the accomplishment of the following goals:

   (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) The Bank shall continue to adhere to the management plan submitted as a result of the July 31, 1991 MEMORANDUM OF UNDERSTANDING which includes:

   (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 or above, and in particular the President and Senior Lending Officer and staff members 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 requirements that each Bank Officer, staff member, or other person performing the duties normally performed by a Bank officer or staff member, be covered under the Bank's blanket bond;
   (v) evaluation of the advisability and appropriateness of using an outside consultant to perform duties normally performed by a bank officer or staff member; and
   (vi) 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 Trustees 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), 1(b)(iii) and 1(b)(v) of this ORDER.

(d) (i) The written management plan shall continue to include the requirement that the Board of Trustees of the Bank, or a committee, or committees, thereof consisting of not less than a majority of Board members who are independent with respect to 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.
   (ii) At the next meeting of the nominating committee of the Bank, and at each succeeding meeting of that committee at which individuals are nominated for the office of trustee, the committee shall nominate individuals who are independent with respect to the Bank in such number as is necessary to cause a majority of the Board of Trustees to be and to remain independent with respect to the Bank.
   (iii) For purposes of this ORDER, an individual who is "independent with respect to the Bank" shall be any individual (1) who is not an officer of the Bank or any of its affiliated organizations, (2) who is not related by blood, marriage or common financial interest to an officer of the Bank, and (3) who is not indebted to the Bank, directly or indirectly (including the indebtedness of any entity in which the individual has a substantial financial interest), in an amount exceeding five (5.0) percent of the Bank's total equity capital and allowance for loan and lease losses.

[.3] 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 2, 1991 by $350,000 at a minimum.
   (b) Immediately after complying with paragraph 2(a), the Bank shall, to the extent it has not already done so, eliminate from its books, by charge-off, establishment of a specific reserve or collection, all assets or portions of assets classified "Loss" and fifty (50.0) percent of all assets or portions of assets classified "Doubtful" in the joint FDIC/State Report of Examination of the Bank as of December 2, 1991 ("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, by the effective date of this ORDER, the Bank's Board of Trustees, with the assistance of management, shall amend its policy for determining the adequacy of the Bank's Reserve to address the weakness(es) detailed on page 1-a-11 of the December 2, 1991 joint FDIC/State Report of Examination. The policy shall provide for a review of the Reserve at least once each calender 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 owned, including joint ventures, and exposure therein shall be undertaken along the same lines as the aforementioned loan portfolio review, with any changes necessary to record such assets at fair market value immediately charged to operating expense. The adequacy of the Reserve in relation to the loss potential in the loan portfolio will be reviewed by the Board of {{9-30-92 p.C-2485}}Trustees and adjustments to the Reserve will be made accordingly. Details of these reviews will be incorporated into the minutes of the Board of Trustees, including the factors considered and/or methodology used to determine the adjustments made.

[.4] 3. (a) (i) The Bank's Board of Directors will take all steps necessary to increase, by September 30, 1992, the Bank's Tier 1 capital to a level at or in excess of five (5.0) 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 above such level until March 31, 1993. The Bank's Board of Directors will take all steps necessary to increase, by March 31, 1993, the Bank's Tier 1 leverage capital ratio to a level of at least five and one-half (5.5) percent and shall continue to maintain its Tier 1 leverage capital ratio at or above such level until September 30, 1993. The Bank's Board of Directors will take all steps necessary to increase, by September 30, 1993, the Bank's Tier 1 leverage capital ratio to a level of at least six (6.0) percent and shall continue to maintain its Tier 1 leverage capital ratio at or above such level until March 31, 1994. The Bank's Board of Directors will take all steps necessary to increase, by March 31, 1994, the Bank's Tier 1 leverage capital ratio to a level of at least six and one-quarter (6.25) percent and shall continue to maintain its Tier 1 leverage capital ratio at or above such level until September 30, 1994. The Bank's Board of Directors will take all steps necessary to increase, by September 30, 1994, the Bank's Tier 1 leverage capital ratio to a level of at least six and one-half (6.5) percent and shall continue to maintain its Tier 1 leverage capital ratio at or above such level until March 31, 1995. The Bank's Board of Directors will take all steps necessary to increase, by March 31, 1995, the Bank's Tier 1 leverage capital ratio to a level of at least six and three-quarters (6.75) percent and shall continue to maintain its Tier 1 leverage capital ratio at or above such level until September 30, 1995. The Bank's Board of Directors will take all steps necessary to increase, by September 30, 1995, the Bank's Tier 1 leverage capital ratio to a level of at least seven (7.0) percent and shall continue to maintain its Tier 1 leverage capital ratio at or above such level while this ORDER is in effect. Toward this end, the Bank shall develop a revised Capital Plan which will be submitted to the Regional Director and the Commissioner for approval within sixty (60) days of 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 the revised Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, which became effective April 10, 1991.

   (i) the sale of new offerings of common stock or perpetual preferred stock;
   (ii) the retention of earnings;
   (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 {{9-30-92 p.C-2486}}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) the reduction of the overall size of the Bank through the sale of assets or other means;
   (vi) any combination of the above means; or
   (vii) any other means acceptable to the Regional Director and the Commissioner.

[.5] 4. (a) Within sixty (60) days of the effective date of this ORDER, the Board of Trustees, 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 joint venture investment in excess of $300,000 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 or 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; {{9-30-92 p.C-2487}}
   (ii) in the case of other real estate owned and joint ventures, evaluate the property and provide cost/benefit analyses of holding the property versus current liquidation value.

   [.6] 5. The bank shall not extend or renew, directly or indirectly, credit, to, or knowingly for the benefit of, any borrower who or which, as of the Examination, 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 Trustees 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 4 of this ORDER as to such borrower, if applicable, and (3) approves such extension or renewal. A written record of the Board of Trustees' determination and approval of any extension or renewal under the terms of this paragraph 5 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the Board of Trustees. Notwithstanding the foregoing provisions, this ORDER shall not require such approvals by the Board of Trustees for extensions of credit made pursuant to a legally binding contractual commitment entered into by the Bank prior to the effective date 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 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 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. The Bank, its trustees, officers, {{9-30-92 p.C-2488}}and employees shall continue to follow the written loan policy approved by the Board of Trustees at the October 11, 1991 meeting pursuant to the July 31, 1991 MEMORANDUM OF UNDERSTANDING.

[.9] 8. (a) Within sixty (60) days of the effective date of this ORDER, the Bank shall develop a revised 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 Trustees 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 within sixty (60) days from the effective date of this ORDER. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Trustees shall approve the written profit plan, 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 Trustees. 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 Trustees, and such approval shall be recorded in the minutes of the Board of Trustees. The Bank, its trustees, officers, and employees shall follow the written profit plan and/or any subsequent modification thereto.

   [.11] 10. Within sixty (60) days from the effective date of this ORDER, the Bank shall develop a plan of action to correct all exceptions noted for Internal Routines and Controls on pages 6-a, and Internal Routine and Controls-In House Data Processing on pages 6-c of the Examination. Such plan shall also provide for the implementation of procedures to ensure the aforementioned deficiencies do not recur.

   [.12] 11. By the effective date of the ORDER, the Bank's Board of Trustees shall establish a comprehensive policy requiring the adequate appraisal and periodic reappraisal of all other real estate owned and joint ventures in which the Bank is invested. All appraisals made pursuant to this paragraph 10 shall be made in accordance with the minimum appraisal guidelines defined in Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. part 323, as existing on the effective date of this ORDER and as hereinafter amended. Copies of all appraisals made pursuant to this paragraph 10, in excess of $300,000 shall be submitted to the Regional Director and the Commissioner for their review.

[.13] 12. (a) 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.