Federal Deposit
Insurance Corporation

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[¶10,683] In the Matter of First County Bank, Stamford, Connecticut, Docket No. FDIC-92-332b (12-14-92).

   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 whose policies are detrimental to the Bank; engaging in practices which produce inadequate operating income; failing to provide adequate supervision over the Bank's affairs; failing to submit Reports of Condition and Income in accordance with instructions; operating with excessive investment portfolio risk; and operating without proper internal routine and controls. (This order was terminated by order of the FDIC dated 8-3-94; see ¶15,896A.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.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] Investment Policy—Revision—Minimum Requirements
   [.11] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.12] Violations of Law—Eliminate/Correct
   [.13] Loans—Concentrations of Credit—Reduction Plan

In the Matter of

FIRST COUNTY BANK
STAMFORD, CONNECTICUT
(Insured State Nonmember Bank)
ORDER TO CEASE
AND DESIST
FDIC-92-332b
   First County Bank, Stamford, 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 18, 1992, whereby solely for the purpose of this proceeding and without admitting or denying 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 de- {{2-28-93 p.C-2899}}termined 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), 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) operating with management whose policies and practices are detrimental to the Bank;
   (f) engaging in practices which produce inadequate operating income and excessive loan losses;
   (g) 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;
   (h) failing to submit Reports of Condition and Income in accordance with prevailing instructions;
   (i) operating with excessive investment portfolio risk;
   (j) operating without proper internal routine and controls.
   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.

   [.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.

   [.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 at the level of vice president, or above, and the auditor 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 per- {{2-28-93 p.C-2900}}sonnel with the requisite ability, experience and other qualifications, which the Board of Directors determines are necessary to fill Bank officer 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 a committee thereof not less than a majority of whom 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 director, 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 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, (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 eliminate from its books, by charge off, collection, or the establishment of a valuation reserve in the case of CMO residuals, 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 State/FDIC Report of Examination of the Bank as of March 16, 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.
   (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 {{2-28-93 p.C-2901}}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 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 have Tier 1 capital at or in excess of four and three quarters (4.75) percent of the Bank's total assets ("Tier 1 leverage capital ratio") by December 31, 1992, and shall achieve a Tier 1 leverage capital ratio of five (5.0) percent by June 30, 1993. The Bank shall thereafter continue to maintain its Tier 1 leverage capital ratio at or in excess of the five (5.0) percent 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.
   (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.
   (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 sale of new offerings of common stock or perpetual preferred stock;
   (ii) the direct contribution of cash by the directors of the Bank;
   (iii) the collection of all or part of assets classified "Loss" within the Examination 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;
   (iv) the collection in cash of assets previously charged off;
   (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 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 $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 March 16, 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) 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 evaluate the property and provide cost/ benefit analyses of holding the property versus current liqidation value.

   [.6] 5. The Bank shall not knowingly extend or renew, directly or indirectly, credit to, or 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 (whether full Board or Executive Committee) 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, and (3) approves such extension or renewal. A written record of such 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. The proscription of this paragraph does not apply to any written commitments entered into prior to the date of this ORDER.

   [.7] 6. The Bank shall not accrue interest on any loan (other than consumer loans) 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. Consumer loan delinquencies are to be reported consistent with applicable call report instructions.

   [.8] 7. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall revise its written loan policy to include, at a minimum, the following steps:

   (i) a procedure to evaluate the adequacy of the loan loss reserve;
   (ii) a procedure to review all outstanding loans and develop guideline to classify problem credits;
   (iii) procedures to handle overdrafts and past due reports;
   (iv) a nonaccrual policy;
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   (v) procedures to handle securities, extensions and renewals of loans;
   (vi) collection procedures;
   (vii) procedures to manage letters of credit;
   (viii) a revised loan policy to address such items as the portfolio mix, risk diversification and guidelines on the volume of loans in relation to total assets; and,
   (ix) develop guidelines to reduce the concentration of credit to one borrower.

   [.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 completely revise its written investment policy to insure that it covers goals and strategies for improving the quality of the Bank's investment portfolio, including prudent supervision and management of hedging portfolios, liquidity management, standards for evaluation of securities dealers, investments in mutual funds, and procedures for obtaining prospectus supplements or other available investment information prior to making any investments.
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   (b) The completely revised written investment policy shall, at a minimum, include the following steps:

   (i) develop specific hedging goals as part of overall efforts to lessen interest rate risk and incorporate revisions to interest rate risk management policy;
   (ii) develop procedures for securities risk analysis;
   (iii) identify position limits;
   (iv) require performance review of investment portfolio;
   (v) develop clear goals, guidelines, and performance measures for the trading account;
   (vi) the liquidity measure presently derived only from FHLB standards, must be expanded to include volatile liabilities;
   (vii) establish standards to evaluate securities dealers;
   (viii) expressly delete the authorization for purchasing financial futures; and,
   (ix) expressly authorize the Bank to purchase approved mutual funds.

   [.11] 10. Within sixty (60) days from the effective date of this ORDER, the Bank shall correct all internal routine and control deficiencies involved in its management and accounting of repurchase agreements, wire transfers, other real estate, past due reports, cash reserve accounts, vacation policy, general ledger accounts for taxes, investment information, and general ledger reconciliations.

   [.12] 11. Within sixty (60) days from the effective date of this ORDER, the Bank shall eliminate and/or correct all remediable violations of Federal Reserve Board Regulation O and the Department of the Treasury regulations enforcing Section 15(c) of the Securities and Exchange Act of 1934.

   [.13] 12. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall formulate and implement a plan to reduce all concentrations of loans to one borrower to less than twenty-five (25.0) percent of the Bank's Tier 1 capital.
   (b) Within sixty (60) days from the effective date of this ORDER, the Bank shall develop a plan, which is acceptable to the Regional Director and the Commissioner, for the orderly divestiture of the inverse floating rate CMOs described in the Report of Examination under other assets listed for "Special Mention."
   (c) In regard to the other cited deficiencies in the loans and other assets listed for "Special Mention" in the Report of Examination, the Bank shall develop a plan, within sixty (60) days, which will provide for the orderly correction of the noted deficiencies.