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{{1-31-94 p.TC-244}}
[15,757] Docket No. FDIC-92-286b (11-29-93)

In the Matter of

PELHAM BANK AND TRUST
COMPANY

PELHAM, NEW HAMPSHIRE
(Insured State Nonmember Bank)
MODIFICATION OF THE ORDER
TO CEASE AND DESIST

   Pelham Bank and Trust Company, Pelham, New Hampshire ("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 September 21, 1992, Docket No. FDIC-92-286b ("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 A MODIFICATION OF THE ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated November 23, 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 TO CEASE AND DESIST as follows:
Paragraph 1 is hereby amended by adding to the end thereof, the following:

       (f) The Board of Directors shall periodically review the Management Plan and revise it as necessary to ensure that al staffing needs of the Bank, in particular in the areas of loan administration, review and workout, are met.
Paragraph 2(b) is hereby stricken and, in its stead, is inserted the following:
    2. (b) By October 25, 1993, the Bank shall eliminate from its books, by chargeoff 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 17, 1993 ("Examination"), which have not been previously collected or charged off. The Bank shall eliminate assets or portions of assets classified "Loss" and "Doubtful" in any subsequent Report(s) of Examination as provided herein. 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.
Paragraphs 4(a) and (b) are hereby stricken and, in their stead, are inserted the following:
4. (a) By December 15, 1993, the Board of Directors shall develop a written plan of action to lessen the Bank's risk posi- {{1-31-94 p.TC-245}}tion with respect to each borrower who or which had outstanding principal debt owing to the Bank in excess of $150,000 and each parcel of other real estate ("ORE") with book value in excess of $150,000 which was classified "Substandard" or "Doubtful." in whole or in part, as of May 17, 1993. The Bank shall add to its written plan of action loans and ORE in excess of $150,000 which are so classified in any subsequent Report of 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 the Examination as well as any additional assets that are in need of criticism according to internal Bank review; 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 4, "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 Banking Department of the State of New Hampshire. 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 4(a) shall be submitted to the Regional Director and the Commissioner for review and comment by December 15, 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 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 plan of action and/or any subsequent modification thereto.
Paragraph 7 is hereby stricken and, in its stead, is inserted the following:
7. (a) By December 15, 1993, the Bank shall revise its written loan policy to include, at a minimum:
       (i) the identification of general fields of lending in which the Bank will engage and the types of loans permitted to be made within each general field;
       (ii) guidelines under which unsecured loans will be granted;
       (iii) guidelines for terms of repayment for unsecured loans and secured loans; and
       (iv) appropriate and adequate collection procedures, including, but not limited to, the specific actions to be taken against borrowers who fail to make timely payments.
   (b) The revised written loan policy shall be submitted to the Regional Director and the Commissioner for review and comment by December 15, 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 revised 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 {{1-31-94 p.TC-246}}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 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.
Paragraph 9 is hereby amended by adding to the end thereof, the following:
   (c) By December 15, 1993, the Bank shall revise its written funds management policy to include (i) a minimum liquidity ratio sufficient to support the Bank's liquidity needs based on the current condition of the Bank, (ii) the maintenance of documentation supporting the minimum liquidity ratio, and (iii) the Bank's methodology for calculating cost of funds. The revised written funds management policy shall be submitted to the Regional Director and the Commissioner for review and comment by December 15, 1993 and shall be treated as a modification pursuant to paragraph 9(b) hereof.
Paragraph 12 is hereby stricken and, in its stead, is inserted the following:
    12. (a) By January 15, 1994, the Bank shall correct the remediable technical exceptions on loans noted on pages 2-d through 2-d-2 of the Examination.
       (b) By December 15, 1993, the Bank shall correct the Internal Routine and Control deficiencies noted on page 6-c of the Examination.
       (c) By December 15, 1993, the Bank shall correct the cited deficiencies in the loans listed for "Special Mention" on pages 2-b through 2-b-2 of the Examination.
Paragraph 13 is hereby stricken and, in its stead, is inserted the following:
   13. By January 15, 1994, the Bank shall eliminate and/or correct all remediable violations of law and regulations committed by the Bank as described on pages 6-b through 6-b-5 of the Examination.
Paragraph 14 is hereby renumbered as paragraph 18 and the following new paragraphs 14, 15, 16, and 17 are hereby added:
   14. (a) By January 15, 1994, the Bank shall develop a comprehensive written audit policy which shall include, at a minimum, provisions requiring the following:
       (i) Bank records are complete and adequate;
       (ii) transactions are promptly and properly recorded in the accounts;
       (iii) assets are adequately safeguarded and properly presented in financial reports;
       (iv) liabilities are completely disclosed and accounted for;
       (v) collateral and other nonledger items are properly recorded and protected by effective custodial controls;
       (vi) compliance with applicable statutes and regulations;
       (vii) compliance with policies set forth by management and or the Directorate, including verification that loans and securities have been properly approved;
       (viii) accounting for the receipt of income and review of expenses to determine that they are authorized, correct in amount and consistent with Bank policy;
       (ix) appraising performance of personnel with regard to leaving adequate audit trails;
       (x) preparing a proper and complete set of workpapers covering each audit;
       (xi) direct and indirect verification of loan and deposit balances on a periodic basis; and
       (xii) the review of loan losses, operating charge-offs, and the control exercised over recoveries.
   (b) The written audit policy shall be submitted to the Regional Director and the Commissioner for review and comment by January 15, 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 audit 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 audit policy may be made only {{1-31-94 p.TC-247}}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 audit policy and/or any subsequent modification thereto.
   15. (a) By January 15, 1994, the Bank shall develop a written conflicts of interest policy, which shall include, but not be limited to, the following:
       (i) specific guidelines relative to possible conflict of interest situations and prohibitions against self-dealing, including a provision governing the Board's involvement in making individual determinations;
       (ii) specific guidelines governing voting abstention in possible conflict of interest situations;
       (iii) conditions for the proper business conduct of those associated with the bank in either their official capacities or otherwise;
       (iv) provisions identifying how Bank properties are to be listed with brokers, when broker commissions will be paid, when insiders may/may not participate in discussions over sale of property;
       (v) conditions pursuant to which payments are made to insiders;
       (vi) a provision requiring adequate documentation in support of any payments to insiders; and
       (vii) provisions to ensure compliance with the conflicts of interest policy as well as compliance with Federal Reserve Regulation O, including a provision requiring that members of the Board of Directors, principal shareholders and executive officers disclose all related interests to the Bank on a timely basis and that a report of such information be filed by affected individuals on a periodic basis.
In developing such policy, the Bank shall consider Bank Letter 8-89, titled "Conflicts of Interest in Real Estate Lending and Other Insider-Related Transactions."
       (b) The written conflicts of interest policy shall be submitted to the Regional Director and the Commissioner for review and comment by January 15, 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 conflicts of interest 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 conflicts of interest 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 conflicts of interest policy and/or any subsequent modification thereto.
   16. By December 15, 1993, the Bank shall develop a written environmental risk policy. In developing such policy, the Bank shall consider Financial Institution Letter 14-93, titled "Guidelines for an Environmental Risk Program." The written environmental risk policy shall be submitted to the Regional Director and the Commissioner for review and comment by December 15, 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 environmental risk 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 environmental risk 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.
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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 environmental risk policy and/or any subsequent modification thereto.
   17. (a) By January 30, 1994 the Bank shall cause an independent external study or audit ("Audit") to be made of all transactions not individually pre-authorized in writing by the Bank's Board of Directors occurring from January 1, 1979 through the effective date of this MODIFICATION involving the following:
       (i) retainers paid to attorneys;
       (ii) all health insurance premiums paid for the benefit of non-employees;
The purpose of the Audit shall be to assist the Bank in determining whether the Bank should seek restitution from or institute legal action against individuals responsible for such transactions, to recover unwarranted benefits received, or damages or loss sustained by the Bank from such transactions. Toward this end, the Audit shall identify, at a minimum, the following:
       1) A description of the nature and purpose of the transaction;
       2) Date(s) of transaction;
       3) Parties involved, (including individuals or their related interest(s) benefitting from such transactions);
       4) Amounts involved;
       5) The manner in which such transactions were approved and/or authorized, and the officers and/or directors who approved and/or authorized such transaction on behalf of the Bank, or, in the alternative, whether the transactions took placeultra vires and, if so, who was responsible for the ultra vires activity;
       6) The cost, or amount of loss or damage to the Bank resulting from such transaction; and
       7) The amount of benefit received by any individuals or their related interest(s) from such transactions.
   (b) The Board of Directors shall be provided with written findings and recommendations from the individual or entity conducting the Audit. The receipt of such findings and recommendations shall be deemed to be the "completion" of the Audit. The Audit shall be completed by January 30, 1994. Upon receipt of the Audit findings and recommendations, the Board of Directors of the Bank shall submit a copy of such findings and recommendations to the FDIC and the Commissioner.
   (c) Following completion of the Audit, the members of the Bank's Board of Directors who are independent with respect to the Bank shall promptly review the findings and recommendations of the Audit, seek restitution on behalf of the Bank, when warranted, from any individuals or entities who or which have received unwarranted benefits from such transactions, consult with legal counsel to determine the appropriateness of instituting legal action based upon the Audit's findings and develop a written report of the Bank's proposed course of action. The written report of the Bank's proposed course of action shall be completed and submitted to the Regional Director and the Commissioner for review and comment by February 15, 1994. Should the Bank's proposed course of action be inconsistent with any of the Audit findings and recommendations, the written report of the Bank's proposed course of action shall explain and document the reasons for the Bank's proposed course of action in relation to the Audit findings and recommendations. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after submission to the Regional Director and the Commissioner of the written report of the Bank's proposed course of action, the Board of Directors shall approve the written report of the Bank's proposed course of action, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Any deviation from the written report of the Bank's proposed course of action may be performed only after giving the Regional Director and the Commissioner written notice of the proposed deviation with supporting documentation, and after consideration of any responsive comments received from the Regional Director and/or the Commissioner within thirty (30) days from their receipt of the notice of proposed deviation.
Following the effective date of this MODIFICATION, the Bank shall send to its share- {{2-28-94 p.TC-249}}holders a description of this MODIFICATION, (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 MODIFICATION in all material aspects. 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 modified, terminated, suspended, or set aside by the FDIC.
   Dated at Westwood, Massachusetts this 29th day of November, 1993.
   Pursuant to delegated authority.

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