Federal Deposit
Insurance Corporation

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   [¶10,284] In the Matter of Fairfield First Bank & Trust Company, Southport, Connecticut, Docket No. FDIC-91-205b (7-24-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with excessive volumes of adversely classified assets; operating without an adequate loan policy; 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; 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 with inadequate routine and controls policies. (This order was modified by order of the FDIC dated 4-16-93; see ¶ 15,652.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Board of Directors—Election—Outside Directors Added
   [.4] Allowance for Loan and Lease Losses—Establish/Maintain
   [.5] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.6] Loans—Risk Position—Reduction Required
   [.7] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.8] Loans—Overdue—Accrual of Interest
   [.9] Loan Policy—Written Revision—Minimum Requirements
   [.10] Profit Plan—Minimum Requirements
   [.11] Funds Management—Written Policy Required
   [.12] Loans—Concentration of Credit—Reduction Required
   [.13] Dividends—Restricted
   [.14] Liquidity Ratio—Increase/Maintain
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   [.15] Bank Operations—Internal Routine and Controls—Correct Deficiencies
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Violations of Law—Eliminate/Correct
   [.18] Compliance Reports—Frequency

In the Matter of

FAIRFIELD FIRST BANK & TRUST COMPANY
SOUTHPORT, CONNECTICUT (Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Fairfield First Bank & Trust Company, Southport, 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 July 9, 1991, 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 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:

ORDER TO CEASE AND DESIST
   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. section 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) operating without an adequate loan policy, resulting in a failure to provide for adequate diversity within the loan portfolio;
   (c) engaging in a violation of applicable laws and regulations;
   (d) operating with management whose policies and practices are detrimental to the Bank or engaging in management policies and practices which are detrimental to the Bank;
   (e) engaging in practices which produce inadequate operating income and excessive loan losses;
   (f) failing the provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and/or regulations;
   (g) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   (h) failing to submit Reports of Condition and Income in accordance with prevailing instructions;
   (i) operating with inadequate liquidity;
   (j) operating with excessive interest rate risk exposure;
   (k) operating without proper internal routine and controls.
   IT IS FURTHER ORDERED, that the Bank and its institution-affiliated parties take affirmative action as set forth below. Solely for purposes 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 will not be deemed to be in violation of paragraphs (a) through (k) above, except to the extent that the Bank is 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. At a minimum, such management shall include a chief executive officer and senior lending officer with proven ability in managing a bank of comparable size and experience in upgrading a low quality loan portfolio. Such persons shall be pro- {{9-30-91 p.C-1215}}vided the necessary written authority to implement the provisions of this ORDER. The qualifications of management shall be assessed on its ability to:

   (i) comply with the requirements of this ORDER,
   (ii) operate the Bank in a safe and sound manner,
   (iii) comply with applicable laws and regulations, and
   (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness and liquidity.

   [.2] (b) In order to have acceptable management, within sixty (60) 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, and in particular the chief executive officer and senior lending officer, 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;
   (iv) written justification for any compensation to be paid to Directors in excess of a standard monthly attendance fee supported by a description of services performed, time allocated to each service, and the method used to determine the amount of compensation;
   (v) written justification for any bonus to be paid to an executive officer in excess of base salary, supported by a discussion of the officer's effectiveness in achieving operating goals of the institution;
   (vi) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the Board of Directors determines are necessary to fill Bank officer positions consistent with the Board's analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b)((iii) of this ORDER.

   [.3] (d) (i) The written management plan shall also include the requirement that the Board of Directors of the Bank, or a committee thereof consisting of not less than a majority of Board members who are independent with respect to the Bank, provide supervision over lend- {{9-30-91 p.C-1216}}ing, 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 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 and who does not own more than eight (8.0) percent or more 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 eight (8.0) percent of the Bank's total equity capital and allowance for loan and lease losses.

   [.4] 2. (a) Within ten (10) days from the effective date of this ORDER, the Bank shall, unless it has already done so, increase its allowance for loan and lease losses ("Reserve") by $444,000 at a minimum as compared to the allowance existing as of September 30, 1990.
   (b) Immediately after complying with paragraph 2(a), the Bank: (1) shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" in the Federal Deposit Insurance Corporation's Report of Examination dated October 12, 1990, ("Examination") except for $165,000 of accrued interest on delinquent loans which are both well secured and in the process of collection; and (2) shall either (A) eliminate from its books by charge-off or collection, or (B) if the asset is an extension of credit or lease, increase its Reserve by an amount equal to fifty (50.0) percent of those assets or portions of assets classified "Doubtful" in the 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.
   (c) Thereafter, the Bank shall maintain its Reserve in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income ("Instructions"). Toward this end, within sixty (60) days from the effective date of this ORDER, the Bank's Board of Directors shall establish a comprehensive policy for determining the adequacy of the Bank's Reserve. The policy shall provide for a review of the Reserve at least once each calendar quarter. The review should focus on 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 September 30, 1990, and the effective date {{9-30-91 p.C-1217}}of this ORDER, shall, at a minimum, reflect a Reserve that should have been maintained in accordance with the Instructions. If necessary to comply with this paragraph 2(d), the Bank shall file amended Reports of Condition and Income within ten (10) days from the effective date of this ORDER.
   (e) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the Board of Directors of the Bank shall: (1) review the adequacy of the Bank's Reserve, (2) provide for an adequate Reserve, and (3) accurately report the Reserve in any such Report of Condition and Income. The minutes of the Board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the Reserve, and the basis for determining the amount of allowance provided.

   [.5] 3. (a) (i) For the life of this ORDER, the Bank shall continue to maintain a Tier 1 Capital Ratio at six (6.0) percent or above.

   (ii) For purposes of this ORDER, the term "Tier 1 capital" means the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus), and minority interests in consolidated subsidiaries, minus all intangible assets other than mortgage servicing rights (to the extent that such rights are allowable as capital in Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, as existing on the date of the issuance of the ORDER and as hereinafter amended), off balance sheet items classified loss, liabilities not shown on the Bank's books, estimated losses on contingent liabilities, differences in accounts which represent shortages, any other losses identified subsequent to the Examination which have either not been recognized on the Bank's books or have not been collected or otherwise settled, and investments in securities subsidiaries subject to 12 C.F.R. § 337.4.
   (iii) For purposes of this ORDER, the term "total assets" means the average of total assets required to be included in the Bank's "Reports of Condition and Income," as this report may from time to time be revised, as of the most recent report date (and after making any necessary subsidiary adjustments as described in 12 C.F.R. § 325.5(d) and (e) of the FDIC's Rules and Regulations in effect as of the date of the issuance of this ORDER), minus intangible assets other than mortgage servicing rights (to the extent that such rights are allowable as capital in Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, as existing on the date of the issuance of the ORDER and as hereinafter amended) and any other assets that are deducted in determining Tier 1 capital.

   [.6] 6. (a) Within sixty (60) days from the effective date of this ORDER, the Board of Directors shall develop and implement a written plan of action to lessen {{9-30-91 p.C-1218}}the Bank's risk position with respect to each borrower who or which had outstanding principal debt owing to the Bank in excess of $150,000 which was classified "Substandard" or "Doubtful," in whole or in part, as of October 12, 1990. 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.
   Based upon such review and evaluation, the written plan of action shall: (A) set forth a program for the reduction of the aggregate dollar volume of "Substandard" or "Doubtful" classifications to the below indicated levels of aggregate adverse classifications as a percentage of equity capital and reserves within the below indicated timeframes, measured from the effective date of this ORDER:
   1) Not more than ninety percent (90%) by December 31, 1991, and
   2) Not more than fifty percent (50%) by December 31, 1992.
   (B) provide for the submission of written monthly progress reports to the Bank's Board of Directors for review and notation in the Board minutes. 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 State banking department. 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 ORDER.
   (b) The written plan of action described by paragraph 5(a) shall be submitted to the Regional Director and the State Banking Commissioner for review and comment. No sooner than thirty (30) days, but under no circumstances more than forth-five (45) 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 State Banking Commissioner written notice of the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and/or the State Banking 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.

   [.7] 5. The Bank shall not extend or renew, directly or indirectly, credit to, or for the benefit of, any borrower who 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 first (1) determines that such advance 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 advance. A written record of the Board of Directors' determination and approval of any advance 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.

   [.8] 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. 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. The Bank shall review all call reports submitted since March 31, 1989 to determine whether revised reports are necessary to accurately reflect the reversal of such income from the bank's books.

   [.9] 7. (a) Within ninety (90) days from the effective date of this ORDER, the Bank {{9-30-91 p.C-1219}}shall revise its written loan policy, which revision shall include, at a minimum:

   (i) guidelines for issuing letters of credit;
   (ii) guidelines for monitoring and preventing industry and individual concentrations of credit;
   (iii) the responsibility of the Board of Directors in reviewing, ratifying and approving loans;
   (iv) standards for applying appraisal regulations, including obtaining and reviewing real estate appraisals, as well as for ordering reappraisals;
   (v) the guidelines for rates of interest and terms of repayment for unsecured loans and secured loans;
   (vi) with regard to secured loans: (1) limitations on the amount advanced in relation to the value of the collateral, and (2) the documentation required by the Bank for each type of secured loan;
   (vii) the maintenance and review of complete and current credit files on each borrower;
   (viii) appropriate and adequate collection procedures, including, but not limited to, the actions to be taken against borrowers who fail to make timely payments;
   (ix) guidelines establishing limitations on the maximum volume of loans in relation to total assets;
   (x) guidelines for placing loans on nonaccrual and provisions for reversal of all accrued interest from such loans;
   (xi) the determination and documentation of sources and terms of loan repayment;
   (xii) specific guidelines for structuring and monitoring commercial construction loans;
   (xiii) maintenance of written, individual loan file comments by officers;
   (xiv) periodic review of the overdue, problem and/or adversely classified or special mention loans by the Board of Directors, so as to monitor management's administration of such distressed credits, and to provide guidance;
   (xv) procedures regarding designations of nonaccrual loans;
   (xvi) procedures for identifying, supervising, and collecting problem loans; and
   (xvii) limitations on the extension of credit through overdrafts.

   [.10] 8. (a) Within thirty (30) 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.

   [.11] 9. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall develop a written funds management policy which shall include, at a minimum:

   (i) the Bank's liquidity needs and plans for 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) 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.

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

   [.14] 12. Within 360 days from the effective date of this ORDER, the Bank shall increase its "Liquidity Ratio" to at least twenty (20.0) percent, and shall thereafter maintain its liquidity ratio at that level, calculated on an average weekly balance method for calendar quarterly periods and shall reduce its "Dependency Ratio" to five (5.0) percent or less. The method of ratio computation is found on page 5-a of the Examination.

   [.15] 13. Within sixty (60) days of the effective date of this ORDER, the Bank shall correct the internal routine and controls deficiencies cited on page 6-c of the Examination, and institute procedures to prevent their recurrence.
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   [.16] 14. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (1) in conjunction with the Bank's next shareholder communication, and also (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Section, Washington, D.C. 20429, for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.

   [.17] 15. Within sixty (60) days from the effective date of this ORDER, the Bank shall eliminate and correct the violation of law and regulations committed by the Bank as described on pages 6-b of the Examination.

   [.18] 16. Within thirty (30) days from the effective date of this ORDER, and, thereafter, within thirty (30) days from the end of each calendar quarter, the Bank shall furnish written progress reports to the Regional Director and the State Banking 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 State Banking 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.
   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.
   This ORDER has been reviewed and concurred in by the State Banking Commissioner.
   The provisions of this ORDER shall remain 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.
   Pursuant to delegated authority.
   Dated at Needham, Massachusetts this 24th day of July, 1991.