Federal Deposit
Insurance Corporation

{{3-31-94 p.C-2793}}
   [¶10,657] In the Matter of Connecticut River Bank, Charlestown, New Hampshire, Docket No. FDIC-92-309b (10-27-92).

   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 in violation of applicable laws or regulations; operating with management policies 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; failing to submit Reports of Condition and Income in accordance with instructions; operating with inadequate liquidity; and operating with excessive interest rate risk exposure. (This order was terminated by order of the FDIC dated 1-5-94; see ¶ 15,783.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Loan Loss Reserve—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—Minimum Requirements
   [.9] Profit Plan—Minimum Requirements
   [.10] Funds Management—Written Policy Required
   [.11] Dividends—Restricted
   [.12] Shareholders—Disclosure—Cease and Desist Order
   [.13] Technical Exceptions—Eliminate/Correct
   [.14] Violations of Law—Eliminate/Correct

In the Matter of

CONNECTICUT RIVER BANK
CHARLESTOWN, NEW HAMPSHIRE
(Insured State Nonmember Bank)
ORDER TO CEASE
AND DESIST
FDIC-92-309b
   Connecticut River Bank, Charlestown, 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 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 October 22, 1992, whereby solely for the purpose of this proceeding and without admitting or denying any allegation or implication of fact or the existence of any unsafe or unsound banking practices, violations of law and/or regulations, or any other grounds for the issuance of an ORDER under section 8(b) of the Act, 12 U.S.C. § 1818(b), the Bank consented to the issuance of this 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 {{3-31-94 p.C-2794}}U.S.C. § 1813(u), to the extent such parties are subject to this ORDER pursuant to the Act), cease and desist from the following unsafe or unsound banking practices and violations of law and/or regulations:
   (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 violations of applicable laws and regulations;
   (e) engaging in 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 violations of law and/or regulations;
   (i) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   (j) failing to submit Reports of Condition and Income in accordance with prevailing instructions;
   (k) operating with inadequate liquidity; and
   (l) operating with excessive interest rate risk exposure.
   IT IS FURTHER ORDERED that the Bank (and its institution-affiliated parties, to the extent such parties are subject to this ORDER pursuant to the Act) take affirmative action as set forth below 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 be in violation of paragraphs (a) through (1) above except to the extent that the Bank is not in compliance with the following provisions:

[.1] 1. (a) Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include a loan work out officer with proven ability in managing a bank of comparable size and experience in upgrading a low quality loan portfolio. Such person 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 cause to be developed 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 in particular the loan work out officer, to determine whether these individuals possess the ability, experience and other qualifications required to per- {{12-31-92 p.C-2795}}form 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.

(d) (i) The written management plan shall also include the requirement that the Board of Directors of the Bank, and a committee thereof (the "Compliance Committee"), a majority of which committee shall be Board members who are "independent with respect to the Bank" as defined herein, provide supervision over lending, investment and operating policies of the Bank sufficient to cause the Bank to comply with the provisions of this ORDER.
   (ii) At the next meeting of the shareholders of the Bank, and at each succeeding meeting of the shareholders at which Bank directors are to be elected, the members of the Board of Directors who are also shareholders shall nominate and support the election of candidates to the Board of Directors who are independent with respect to the Bank, in such number as is necessary to cause a majority of the Board of Directors 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 and who does not own more than five (5.0) percent of the outstanding shares of the Bank, (2) who is not related by blood, marriage or common financial interest to an officer of the Bank [or to any stockholder owning more than five (5.0) percent of the Bank's outstanding shares, 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 {{12-31-92 p.C-2796}}shall increase its allowance for loan and lease losses ("Reserve") existing as of March 31, 1992 by $1,928,000 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 classified "Doubtful" in the FDIC Report of Examination of the Bank as of May 18, 1992 ("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 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, among other things, 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.
   (d) Reports of Condition and Income required to be submitted by the Bank as of each Report date, as that term is used in the Instructions, between and including December 31, 1991 and the effective date of this ORDER, shall, at a minimum, reflect a Reserve that should have been 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.
   (e) 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 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) (i) Within six (6) months from the effective date of this ORDER, the Bank shall have Tier 1 capital 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 in excess of such level until twelve (12) months from the effective date of this ORDER; within twelve (12) months from the effective date of this ORDER, the Bank shall have a Tier 1 leverage capital ratio at or in excess of five and one-half (5.5) percent and shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level until eighteen (18) months from the effective date of this ORDER; within eighteen (18) months from the effective date of this ORDER the Bank shall have a Tier 1 leverage capital ratio at or in excess of six (6.0) percent 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 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.
{{12-31-92 p.C-2797}}
   (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 collection of all or part of assets classified "Loss" within the Examinations 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;
   (iii) the collection in cash of assets previously charged off;
   (iv) any combination of the above means; or
   (v) any other means acceptable to the Regional Director and the Commissioner.

[.5] 4. (a) Within sixty (60) 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 and each parcel of other real estate with book value in excess of $100,000 which was classified "Substandard" or "Doubtful," in whole or in part, as of May 18, 1992. The Bank shall add to its written plan of action loans and other real estate in excess of $100,000 which are so classified in any subsequent 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
   (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position; and
   (iii) in the case of other real estate, 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 has a loan or other extension of {{12-31-92 p.C-2799}}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 and the Compliance Committee first (1) determine that such extension or renewal is in the best interest of the Bank, (2) determine that the Bank has satisfied the requirements set out in paragraph 4 of this ORDER as to such borrower, and (3) approve such extension or renewal, either individually or as part of the Bank's work out plan for such borrower. A written record of the Board of Directors' and such committee's 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 Directors and the Compliance Committee. Notwithstanding the foregoing, nothing in this ORDER shall prevent the Bank from honoring legally binding credit commitments that the Bank made and which were outstanding prior to September 4, 1992. For purposes of this paragraph 5, an extension or renewal of credit shall be deemed to have been made "knowingly" for the benefit of a borrower if the Bank knew, or upon reasonable inquiry could have known, that the extension or renewal of credit was for the benefit of that borrower.

   [.7] 6. The Bank shall not accrue interest on any loan that is, or becomes, ninety (90) days or more delinquent a 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. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall revise its written loan policy, which revision shall include, at a minimum:

   (i) guidelines identifying conditions requiring a new appraisal on loans;
   (ii) appraisal standards established by Part 323 of the FDIC's Rules and Regulations;
   (iii) guidelines to assure the timely recognition of losses;
   (iv) the maintenance and review of complete and current credit files on each borrower;
   (v) appropriate and adequate collection procedures, including, but not limited to, the actions to be taken against borrowers who fail to make timely payments;
   (vi) appropriate limitations on extension of credit through overdrafts and cash items;
   (vii) the determination and documentation of sources and terms of loan repayment;
   (viii) retention of lien searches and appraisals covering personal property and liens on real estate;
   (ix) maintenance of written, individual loan file comments by officers;
   (x) provisions addressing the capitalization of accrued and unpaid interest on loans;
   (xi) procedures regarding designations of nonaccrual loans;
   (xii) procedures for identifying, supervising, and collecting problem loans;
   (xiii) periodic review of the overdue, problem and/or adversely classified or special mention loans by the Board of Directors, so as to monitor management's administration of such distressed credits, and to provide guidance;
   (xiv) procedures for the proper accounting of in-substance foreclosure loans; and
   (xv) procedures for the proper accounting of other real estate and its associated income and expenses.

[.9] 8. (a) Within sixty (60) 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] 9. (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] 10. The Bank shall not pay or declare any dividends without the prior written consent of the Regional Director and the Commissioner.

   [.12] 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.

[.13] 12. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall correct all remediable technical exceptions on loans noted on pages 2-c of the Examination.
   (b) Within ninety (90) days from the effective date of this ORDER, the Bank shall correct all remediable cited deficiencies in the loans listed for "Special Mention" on pages 2-b of the Examination.