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{{9-30-97 p.TC-237}}
   [15,751] Docket No. FDIC-91-79b (11-15-93)

This order terminated by order of the FDIC dated 7-25-97. See ¶16,177.)

In the Matter of

SOMERSET SAVINGS BANK
SOMERVILLE, MASSACHUSETTS
(Insured State Nonmember Bank)
MODIFICATION OF THE ORDER
TO CEASE AND DESIST

   Somerset Savings Bank, Somerville, Massachusetts, ("Bank"), having been advised of its right to a Notice of Charges and of Hearing ("Notice") 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), prior to the issuance of the ORDER TO CEASE AND DESIST dated March 19, 1991, Docket No. FDIC-01-79b ("ORDER"), and having been advised of its right to receive a Notice detailing the FDIC's factual support which forms the basis for modifying the ORDER, and of its right to a hearing on such alleged charges under section 8(b)(1) of the Act, 12 U.S.C. § 1818(b)(1), and Part 308 of the FDIC's Rules of Practice and Procedures, 12 C.F.R. Part 308, 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 8, 1993, 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 a MODIFICATION OF THE ORDER TO CEASE AND DESIST ("MODIFICATION") by the FDIC.
   The FDIC accepted the CONSENT AGREEMENT and hereby modifies the ORDER as follows:
The following is hereby added at the end of paragraph 1:

    1. (f) By February 15, 1994, the Bank shall have and retain a qualified individual in the position of president and chief executive officer with proven ability and experience in managing a bank of comparable size. In addition, by February 15, 1994, the Bank shall have and retain a qualified individual in the position of senior loan officer with proven ability and experience in upgrading a low quality loan portfolio. The qualifications of these individuals shall be assessed in accordance with the requirements of paragraph 1(a). In order to comply with this paragraph 1(f), by December 31, 1993, the Board of Directors shall cause to be developed a modification to the management plan, with the primary focus on the positions of president and chief executive officer and senior loan officer. This modification to the management plan shall include, at a minimum:
       (i) an evaluation of the present president and chief executive officer to determine whether this individual possesses 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
       (ii) a plan of action to recruit and hire any additional or replacement personnel {{9-30-97 p.TC-238}}with the requisite ability, experience and other qualifications, which the Board of Directors determines are necessary to satisfy the requirements of this paragraph 1(f).
       This modification to the management plan shall be submitted to the Regional Director and the Commissioner for review and comment by December 31, 1993.
Paragraph 2 is hereby stricken, and in its stead is inserted the following:
   2. If not previously accomplished, by October 31, 1993, the Bank shall have eliminated 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 April 12, 1993 ("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 loans to qualified third party borrowers, does not constitute "collection" or "elimination" for the purpose of this paragraph.
Paragraph 3 is hereby stricken, and in its stead is inserted the following:
       3. (a)(i) By October 31, 1993, the Bank shall have Tier 1 capital at or in excess of four (4.0) percent of the Bank's total assets ("Tier 1 leverage capital ratio") and thereafter shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level until December 31, 1993; by December 31, 1993, the Bank shall have a Tier 1 leverage capital ratio at or in excess of four and one-half (4.5) percent and thereafter shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level until June 30, 1994; by June 30, 1994, the Bank shall have Tier 1 leverage capital ratio at or in excess of five (5.0) percent and thereafter shall continue to maintain its Tier 1 leverage capital ratio at or in excess of five and one-half (5.5) percent and thereafter shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such level until June 30, 1995; by June 30, 1995, 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. The Capital Plan should address both internal and external sources of capital augmentation, retention of earnings, restrictions of assets 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 Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, as in effect on November 8, 1993.
   (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 and 4 of this ORDER. Thereafter, such ratio and its component parts shall be determined only after the Bank has made such additions to its allowance for loan and lease losses ("Reserve") so as to bring the Reserve into compliance with the prevailing requirements of the Instructions for the Reports of Conditions and Income ("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 noncumulative perpetual preferred stock;
       (ii) the direct contribution of cash by the shareholders and/or directors of the bank;
       (iii) the collection of all or part of assets classified: (A) "Loss" within the Examination without loss or liability to the Bank, or (B) "Doubtful" within the Examination without loss or liability to the Bank, provided any collection on such assets shall first be applied to that portion of the assest 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 Bank's Reserve and, if the Board of Directors' review of the adequacy of the Reserve required by paragraph 4 of this ORDER indicates that such Reserve has a balance in excess of that required for adequacy, any such excess may be trans- {{1-31-94 p.TC-239}}ferred 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.
   (d) If, after having achieved the six (6.0) Tier 1 leverage capital ratio specified in paragraph 3(a)(i), such ratio declines below six (6.0) percent at any month-end, the Bank, within forty-five (45) days after such month, 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. Thereafter, the Bank 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. Upon approval by the Regional Director and the Commissioner, the Bank shall immediately implement the written plan.
   (e) In addition to the requirements of paragraphs 3(a)-(d) of this ORDER, the Bank shall comply with the FDIC's Statement of Policy on Risk-Based Capital found in Appendix A to Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, App. A.
   (f) If all or part of any increase in capital made by the Bank in order to meet the requirements of this paragraph 3 involves an offering, other than an offering deemed not to be a public securities offering pursuant to 17 C.F.R. § 230.506 as currently in effect or as hereafter amended, of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the sale of the securities, and, in any event not less than twenty (20) days prior to the dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, Washington, D.C. 20429, for review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (g) In complying with the provisions of paragraph 3(f) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank stock, written notice of any planned or existing development or other change which is materially different from the information reflected in any offering materials used in connection with the sale of Bank securities, if such development or change occurs or is planner prior to the completion of the offering. The written notice required by this paragraph 3(g) shall be furnished within ten (10) calendar days from the date such material development or change was planned or occurred, whichever is earlier, to every purchaser and/or subscriber of Bank stock who received or was tendered the information contained in the Bank's original offering materials.
   (h) The Bank's Board of Directors shall maintain in its minutes a written record of all actions taken by the Bank to comply with the capital requirements of paragraphs 3(a) through 3(g) of this ORDER, including, at a minimum, any action to increase its Tier 1 capital by each of the methods specified in paragraphs 3(c)(i) through 3(c)(vi) of this ORDER.
Paragraph 4 is hereby stricken, and in its stead is inserted the following:
   4. (a) The Bank shall maintain its Reserve in accordance with the prevailing requirements of the Instructions. Toward this end, by December 31, 1993, the Bank's Board of Directors shall review and revise its policy for determining the adequacy of the Bank's Reserve. The revised policy shall, at a minimum, provide for a review of the Reserve at least once each calendar quarter as well as any provisions necessary to address the comments on the Reserve set forth in the Examination. The review should focus on the results of the Bank's internal loan review, loan loss experience, trends of delinquent and nonaccrual loans, as estimate of potential loss exposure on significant credits, concentrations of credit, and present and prospective economic conditions. The adequacy of the Reserve in relation to the loss potential in the loan portfolio will be reviewed by the Board of Directors and {{1-31-94 p.TC-240}}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 and documentation and analyses supporting the use of such methodology.    (b) 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 June 30, 1992, and September 30, 1993, shall, at a minimum, reflect a Reserve that should have been maintained in accordance with the Instructions. If necessary to comply with this paragraph 4(b), the Bank shall file amended Reports of Condition and Income by November 15, 1993.
   (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.
Paragraph 5 is hereby stricken, and in its stead is inserted the following:
    5. (a) By December 31, 1993, 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 ("ORE") with book value in excess of $500,000 which debt or ORE was classified "Substandard" or "Doubtful," in whole or in part, as of April 12, 1993. The Bank shall add to its written plan of action loans and ORE 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 ORE, evaluate the property and provide cost/benefit analyses of holding the property versus current liquidation value.
Based upon such review and evaluation, the written plan of action shall: (A) establish target dollar levels to which the Bank shall reduce the aggregate dollar volume of "Substandard" or "Doubtful" classifications as of April 12, 1993, as well as any additional assets that the Bank subsequently classifies as "Substandard" or "Doubtful" in conjunction with its internal asset reviews; and (B) provide for the submission of written monthly progress reports to the Bank's Board of Directors for review and notation in the minutes of the Board of Directors. Exhibit A provides the form for the progress report. As used in this paragraph 5, "reduce" means to (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC and the Commonwealth of Massachusetts Division of Banks. Payment of loans with the proceeds of the other loans made by the Bank, other than loans to qualified third party borrowers, will not constitute "reduction" or "collection" for purposes of this paragraph.
   (b) The written plan of action described by paragraph 5(a) shall be submitted to the Regional Director and the Commissioner for review and comment by December 31, 1993. 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 plan of action, 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 plan may be made only after giving the Regional Director and the Commissioner written notice of the proposed modification, and after Regional Director and/or the Commissioner within thirty (30) days from their receipt of the notice of proposed modification. No such modifi- {{1-31-94 p.TC-241}}cation 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 of action and/or any subsequent modification thereto.    (c) The Bank's Board of Directors shall review at least once each calendar quarter the methodology used by the Bank to determine the then current carrying value of ORE. The review shall take into account, among other things, the results of recent appraisals and dispositions of ORE, ORE concentrations, if any, and present and prospective economic conditions. Details of these reviews will be incorporated into the minutes of the Board of Directors.
Paragraph 8 is hereby stricken, and in its stead is inserted the following:
   8. The Bank shall maintain a written loan policy that is consistent with all applicable federal and state requirements, including without limitation Part 365 of the FDIC's Rules and Regulations, 12 C.F.R. Part 365. The written loan policy shall be submitted to the Regional Director and the Commissioner for review and comment by December 31, 1993. 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 loan 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 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 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 loan policy and/or any subsequent modification thereto.
Paragraph 9 is hereby stricken, and in its stead is inserted the following:
   9. (a) The Bank shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which 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.
   (b) The written profit plan described by paragraph 9(a) shall be submitted to the Regional Director and the Commissioner for review and comment by December 31, 1993 or, if submission by such date is impracticable, as soon as practicable thereafter but in any event not later than January 31, 1994. 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 profit plan, 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 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 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 profit plan and/or any subsequent modification thereto.
Paragraph 12 is hereby stricken, and in its stead is inserted the following:
   12. By December 31, 1993, the Bank shall endeavor to correct the technical exceptions on loans noted on pages 2-d and 2-d-1 of the Examination.
{{1-31-94 p.TC-242}}
Paragraph 13 is hereby stricken, and in its stead is inserted the following:
   13. By December 31, 1993, the Bank shall eliminate and/or correct all remediable violations of law and regulations committed by the Bank as described on pages 6-a and 6-a-1 of the Examination.
Paragraph 14 is hereby renumbered as
paragraph 16, and the following new
paragraphs 14 and 15 are hereby added:
   14. By December 31, 1993, the Bank shall formulate and implement a plan to reduce the concentration as noted on page 2-b of the Examination to less than twenty-five (25.0) percent of the Bank's Tier 1 capital, and to reduce the concentration as noted on page 2-b-1 of the Examination to less than one hundred (100.0) percent of the Bank's Tier 1 capital.
15. (a) The Bank shall submit a written funds management policy to the Regional Director and the Commissioner for review and comment by December 31, 1993. Such policy shall include, at a minimum:
       (i) the Bank's liquidity needs and plans for insuring 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) plans for monitoring the interest rate sensitivity position of the Bank and alternatives for maintaining an adequate liquidity position under various economic conditions, including the role of investments and deposits; and
       (iv) a statement of the means by which the Bank will coordinate its loan, investment, operating, and budget and profit planning policies with the written funds management policy.
       (b) 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 funds management 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 funds management 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 funds management policy and/or any subsequent modification thereto.
   The Bank shall provide to its stockholders a statement that describes in all material respects the changes to the ORDER set forth in this MODIFICATION, (1) in conjunction with the Bank's next stockholder communication, and also (2) in conjunction with its notice or proxy statement preceding the Bank's next stockholder meeting. The description shall fully describe the MODIFICATION 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.
   This MODIFICATION shall become effective immediately upon its issuance.
   The provisions of the ORDER as modified by this MODIFICATION shall be binding upon the Bank and its institution-affiliated parties.
   This MODIFICATION has been reviewed and concurred in by the Commissioner.
   The provisions of the ORDER as modified by this MODIFICATION shall remain effective and enforceable except to the extent that, and until such time as, any provisions of the ORDER shall have been further modified, terminated, suspended, or set aside by the FDIC.
   Dated at Westwood, Massachusetts this 15th day of November, 1993.
   Pursuant to delegated authority.

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