Federal Deposit
Insurance Corporation

{{8-31-93 p.C-2879}}
   [¶10,679] In the Matter of New England Savings Bank, New London, Connecticut, Docket No. FDIC-92-335b (12-3-92).

   Bank to cease and desist from such unsafe or unsound practices as operating with excessive volumes of adversely classified assets; following 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; operating with excessive interest rate risk exposure; and operating without proper internal routine and controls. (This order was terminated by order of the FDIC dated 6-17-93; see ¶15,688.)

{{8-31-93 p.C-2880}}
   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] 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] Investment Policy—Revision—Minimum Requirements
   [.12] Dividends—Restricted
   [.13] Bank Operations—Internal Routine and Controls—Correct Deficiencies
   [.14] Violations of Law—Eliminate/Correct
   [.15] Affiliated Organizations—Payments to—Restricted

In the Matter of

NEW ENGLAND SAVINGS BANK
NEW LONDON, CONNECTICUT
(Insured State Nonmember Bank)
ORDER TO CEASE
AND DESIST
FDIC-92-335b
   NEW ENGLAND SAVINGS BANK, NEW LONDON, CONNECTICUT ("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 November 19, 1992, whereby solely for the purpose of this proceeding and without admitting or denying any allegation or implication of fact or existence of any unsafe or unsound banking practices or violations of law and/or regulations, 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 U.S.C. § 1813(u) (to the extent that 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 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) operating with management, certain of whose policies and practices 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 {{2-28-93 p.C-2881}}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 prepare Reports of Condition and Income in accordance with prevailing instructions;
   (k) operating with inadequate liquidity;
   (l) operating with excessive interest rate risk exposure;
   (m) operating with inadequate internal routine and control procedures.
   IT IS FURTHER ORDERED that the Bank (and its institution-affiliated parties to the extent that such parties are subject to this ORDER pursuant to the Act) take affirmative action (to the extent such actions have not already been taken by the Bank prior to the issuance of this ORDER) as set forth below. However, for the purpose of enforcement of this ORDER under Section 8(i) of the Act, 12 U.S.C. § 1818(i), the Bank (and its institution-affiliated parties to the extent that such parties are subject to this ORDER pursuant to the Act) will not be deemed to be in violation of the ORDER unless and except to the extent that the Bank and its institution-affiliated parties are not in compliance with the following provisions:

[.1] 1. (a) Within ninety (90) 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. 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.
During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's Boston Regional Office ("Regional Director") and the Banking Commissioner of the Connecticut State Banking Department ("Commissioner") in writing of any changes in management at the level of Senior Vice President or above ("Senior Management"). The notification must include the names and background of any replacement personnel and must be provided prior to the individual's assuming the new position.

   [.2] (b) Within sixty (60) days from the effective date of this ORDER, the Board of Directors shall cause to be completed an independent 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 Senior Management 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 Senior Management 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, or one or more committees thereof, a majority of each of which shall consist of Board members who are "independent with respect to the Bank," as herein defined, 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, directly or indirectly, 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 shall increase its allowance for loan and lease losses ("Reserve") existing as of December 31, 1991 by $11,015,000 at a minimum if it has not already done so by additions to the Reserve made subsequent to December 31, 1991.
   (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 FDIC Report of Examination of the Bank as of January 21, 1992 ("Examination"), which have not been previously collected or charged off, unless exempted in writing from this requirement, as to any particular assets or portions thereof, by the Regional Director and the Commissioner. 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 {{2-28-93 p.C-2883}}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, among other things, 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.
   (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 thirty (30) 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) cause the Bank to provide for an adequate Reserve, and (3) cause the Bank to accurately report the Reserve in any such Report of Condition and Income in accordance with the Instructions. 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) The Bank shall take all action necessary to bring the Bank's capital to a sufficient level and thereafter to operate within a capital structure sufficient in relation to the composition and quality of its assets and funding liabilities and in accordance with Part 325 of the FDIC Rules and Regulations. Toward this end, the Bank will develop a Capital Plan which will be submitted to the Regional Director and the Commissioner for approval within thirty (30) days from the effective date of this ORDER. Immediately upon receipt of the Regional Director's and the Commissioner's approval of the Bank's Capital Plan, including any modifications to the plan suggested by these regulatory authorities, the Bank shall begin to implement such plan. The Capital Plan shall address both internal and external sources of capital augmentation, including capital infusions, retention of earnings, restriction of asset growth, and asset sales, with the goal of producing Tier 1 capital at or in excess of six (6.0) percent of the Bank's total assets ("Tier 1 capital ratio"), with stated timetables in which to attain this goal.
   (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 Rules and Regulations, 12 C.F.R. Part 325, which became effective April 10, 1991.
   (b) If, during the period this ORDER is in effect, the ratio specified in paragraph 3(a) reaches six (6.0) percent and subsequently declines below six (6.0) percent, the Bank, within thirty (30) days after the date on which the 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. Upon approval by the Regional Director and the Commissioner, the Bank shall immediately implement the written plan.
   (c) Any increase in capital necessary to meet the requirements of paragraph 3(a) or 3(b) of this ORDER may be accomplished by:
{{2-28-93 p.C-2884}}

   (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) the reduction of the overall size of the Bank through sale of assets, coupled with investment of additional outside capital;
   (v) any combination of the above means; or
   (vi) 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 Bank 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 $500,000 and each parcel of other real estate with book value in excess of $500,000 which was classified "Substandard" or "Doubtful," in whole or in part, as of January 21, 1992. The Bank shall add to its written plan of action loans and other real estate in excess of $500,000 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 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; and
   (iii) in the case of other real estate {{2-28-93 p.C-2885}}evaluate the property and provide cost/ benefit analyses of holding the property versus current liquidation value.

   [.6] 5. 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 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 a committee thereof 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, to the extent that paragraph 4 is applicable, and (3) approves such extension or renewal. A written record of the Board of Directors' or 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 or committee thereof. Notwithstanding the foregoing, nothing in this ORDER shall prevent the Bank from honoring legally binding credit commitments that the Bank had made and which were legally outstanding prior to the effective date of this ORDER. 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 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. Within thirty (30) days after the effective date of this ORDER, the Bank shall have reversed on its books all previously accrued but uncollected interest {{2-28-93 p.C-2886}}on any loan that has ceased to accrue interest pursuant to this provision.

   [.8] 7. Within sixty (60) days from the effective date of this ORDER, the Bank shall revise its written loan policy to include specific guidelines for the use of internal valuations on real estate transactions. The revised written loan policy shall be submitted to the Regional Director and the Commissioner for review and comment within such sixty-day period. 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 revised written loan policy, taking into consideration any written comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the revised written loan 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 written 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 revised written loan policy and/or any subsequent modification thereto.

[.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 revise its written funds management policy which shall address, 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. Within ninety (90) days from the effective date of this ORDER, the Bank shall revise its written investment policy consisting of goals and strategies for improving the quality of the Bank's investment portfolio, including specific procedures and operating guidelines for the use of mortgage derivative products. The revised written investment policy shall be submitted to the Regional Director and the Commissioner for review and comment within such ninety-day period. 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 investment policy, taking into consideration any written comments on such policy that the Bank shall have received from the Regional Director or the Commissioner, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent modifications to the written investment 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 written comments on such modification that the Bank shall have received from 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 and its officers and employees, subject to the Board of Directors' oversight, shall follow the written investment policy and/or any subsequent modification thereto.

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

   [.13] 12. Within sixty (60) days from the effective date of this ORDER, the Bank shall correct all remediable internal routine and control deficiencies cited on pages 6-c of the Examination.

   [.14] 13. Within sixty (60) days from the effective date of this ORDER, the Bank shall eliminate and/or correct all remediable violations of law and regulations for which the Bank was cited on pages 6-b of the Examination.
   14. 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.

   [.15] 15. As of the effective date of this ORDER, the Bank shall not make any payments, directly or indirectly, to any affiliated organization without the prior written consent of the Regional Director and the Commissioner.
   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 to the extent such parties are subject to this ORDER pursuant to the Act).
   This ORDER has been reviewed and concurred in by the Commissioner.
   The provisions of this ORDER shall re- {{2-28-93 p.C-2888}}main 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 Westwood, Massachusetts this 3rd day of December, 1992.
   Pursuant to delegated authority.