Federal Deposit
Insurance Corporation

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   [¶10,584] In the Matter of The Co-operative Bank of Concord, Concord, Massachusetts, Docket No. FDIC-92-204b (7-1-92).

   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 policies detrimental to the Bank; operating with inadequate loan documentation; engaging in practices which produce inadequate operating income; failing to provide adequate supervision over the Bank's affairs; paying excessive cash dividends; operating with inadequate allowance for loan and lease losses; failing to submit Reports of Condition and Income in accordance with instructions; and operating without proper internal routine and controls. (This order was terminated by order of the FDIC dated 10-14-93; see ¶ 15,741.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.5] Loans—Risk Position—Reduce—Written Plan Required
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Loan Policy—Written Revision—Minimum Requirements
   [.8] Real Estate—Appraisal Policy Required
   [.9] Profit Plan—Minimum Requirements
   [.10] Investment Policy—Revision—Minimum Requirements
   [.11] Dividends—Restricted
   [.12] Shareholders—Disclosure—Cease and Desist Order
   [.13] Technical Exceptions—Eliminate/Correct
   [.14] Violations of Law—Eliminate/Correct
   [.15] Reports of Condition and Income—Amendment Required
   [.16] Compliance Reports—Frequency

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In the Matter of

THE CO-OPERATIVE BANK OF
CONCORD
CONCORD, MASSACHUSETTS
(Insured State Nonmember Bank)
ORDER TO CEASE
AND DESIST
FDIC-92-204b
   The Co-operative Bank of Concord, Concord, Massachusetts ("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 June 17, 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 determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS HEREBY ORDERED that the Bank and its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), 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 imprudent lending and inadequate 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 policies and practices which are detrimental to the Bank;
   (f) operating with deficient or inadequate loan documentation, including but not limited to current financial statements, adequate appraisals, and cash flow and/or operating information;
   (g) engaging in practices which produce inadequate operating income and excessive loan losses;
   (h) failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and/or regulations;
   (i) paying excessive cash dividends in relation to the Bank's net income and/or capital position;
   (j) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;
   (k) failing to submit Reports of Condition and Income in accordance with prevailing instructions; and
   (l) 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 (l) above, except to the extent that the Bank is not in compliance with the following provisions:

[.1] 1. (a) Within one hundred twenty (120) days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include a senior lending/workout officer who shall have an appropriate level of lending, collection and loan supervision experience for the type and quality of the Bank's loans and other real estate. Such person shall be provided 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
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   (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness and liquidity.

During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's Boston Regional Office ("Regional Director") in writing of any changes in management in the manner and to the extent required by section 303.14 of the FDIC's Rules and Regulations, 12 C.F.R. § 303.14, with a copy of the Commissioner of Banks for the Commonwealth of Massachusetts ("Commissioner"). The notification must include the names and background of any replacement personnel and must be provided prior to the individual's assuming the new position.

   (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 and above, and in particular the senior lending/ workout 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; and
   (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the Board of Directors determines are necessary to fill 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, a majority of which 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 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 indi- {{9-30-92 p.C-2492}}vidual (1) who is not an officer of the Bank or any of its affiliated organizations and who does not own more than five (5.0) percent of the outstanding shares of the Bank, (2) who is not related by blood, marriage or common financial interest (other than ownership of common stock) to an officer of the Bank or any of it affiliated organizations or to any stockholder owning more than five (5.0) percent of the Bank's outstanding shares, and (3) who is not indebted to the Bank, directly or indirectly (including the indebtedness of any entity in which the individual has a substantial financial interest), in an amount exceeding five (5.0) percent of the Bank's total equity capital and allowance for loan and lease losses.

[.3] 2. (a) If not previously accomplished, within ten (10) days from the effective date of this ORDER, the Bank shall increase its allowance for loan and lease losses ("Reserve") existing as of September 30, 1991 by $2,000,000 at a minimum.
   (b) Immediately after complying with paragraph 2(a), the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" and either (i) eliminated from its books by charge-off or collection, or (ii) create a specific reserve an amount equal to fifty (50.0) percent of all assets or portions of assets (other than securities) classified "Doubtful" in the FDIC Report of Examination of the Bank as of September 30, 1991 ("Examination"), which have not been previously collected or charged off or reserved for. Reduction of these assets through use of proceeds of loans made by the Bank, other than to qualified third party borrowers, does not constitute "collection" or "elimination" for the purpose of this paragraph.
   (c) Thereafter, the Bank shall maintain its Reserve in accordance with the prevailing requirements of the Instructions 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, 1991 and the effective date of this ORDER, shall, at a minimum, reflect a Reserve that should have been maintained in accordance with the Instructions. If necessary to comply with this paragraph 2(d), the Bank shall file amended Reports of Condition and Income within 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) establish a provision which will result in 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 {{9-30-92 p.C-2493}}the review, including any increases in the Reserve, and the basis for determining the amount of allowance provided.

[.4] 3. (a) (i) By December 31, 1992, 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 June 30, 1993; by June 30, 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 December 31, 1993; by December 31, 1993, the Bank shall have a 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 such level until June 30, 1994; by June 30, 1994, the Bank shall have a 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 December 31, 1994; by December 31, 1994, the Bank shall have a Tier 1 leverage capital ratio at or in excess of six (6.0) percent and thereafter the Bank shall continue to maintain its Tier 1 leverage capital ratio at or in excess of such six (6.0) percent level as calculated herein while this ORDER is in effect. At no time while this ORDER is in effect shall the Bank's Tier 1 leverage capital be less than two (2.0) percent of the Bank's total assets. Toward these ends, the Bank shall develop a Capital Plan which will be submitted to the Regional Director and the Commissioner for approval within ninety (90) 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.

   (i) the retention of earnings and profits;
   (ii) the sale of new offerings of common stock or perpetual preferred stock;
   (iii) the collection of all or part of assets classified "Loss" within the Examinations without loss or liability to the Bank. Reductions to loans 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 currently has outstanding principal debt owing to the Bank in excess of $250,000, and each parcel of other real estate with book value which is currently in excess of $250,000, which was classified "Substandard" or "Doubtful," or listed for "Special Mention," in whole or in part, as of September 30, 1991. The Bank shall add to its written plan of action loans and other real estate in excess of $250,000 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 evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position; and
   (ii) in the case of other real estate, 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 within six (6) and twelve (12) months from the effective date of this ORDER to which the Bank shall reduce the aggregate dollar volume of "Substandard" or "Doubtful" classifications, including any additional assets not so criticized as of September 30, 1991 but in need of similar criticism according to internal Bank review; and (B) provide for the submission of written quarterly progress reports to the Bank's Board of Directors for review and notation in the Board minutes for any such assets over $250,000 (Exhibit A provides the form {{9-30-92 p.C-2495}}for the quarterly progress report); and (C) provide for the submission of written monthly summary progress reports to the Board of Directors for review and notation in the Board minutes. 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 criticism by the FDIC and the Division of Banks, Commonwealth of Massachusetts. 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 4(a) shall be submitted to the Regional Director and the Commissioner for review and comment within sixty (60) days from the effective date of this ORDER. 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.

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

   (i) the responsibility of the Board of Directors in reviewing, ratifying and approving loans;
   (ii) the guidelines under which unsecured loans will be granted;
   (iii) the guidelines for rates of interest and terms of repayment for unsecured loans and secured loans;
   (iv) 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;
   (v) the maintenance and review of complete and current credit files on each borrower;
   (vi) appropriate and adequate collection procedures, including, but not limited to, the actions to be taken against borrowers who fail to make timely payments;
   (vii) guidelines establishing limitations on the maximum volume of loans in relation to total assets;
   (viii) appropriate limitations on ex- {{9-30-92 p.C-2496}}tension of credit through overdrafts and cash items;
   (ix) the determination and documentation of sources and terms of loan repayment, with particular emphasis on home equity lines and loans for the purchase of residential lots;
   (x) procedures for identifying, supervising, and collecting problem loans;
   (xi) a description of the Bank's normal trade area and circumstances under which the Bank may extend credit outside of such area; and
   (xii) guidelines which address the goals for portfolio mix and risk diversification, including real estate development and construction lending, particularly with regard to speculative construction financing.

   (b) The revised written loan policy shall be submitted to the Regional Director and the Commissioner for review and comment within sixty (60) days from the effective date of this ORDER. 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 revised written loan policy may be made only after giving the Regional Director and the Commissioner written notice of the 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 Board of Directors shall consider any comments submitted by the Regional Director and/or the Commissioner within thirty (30) days from their receipt of the notice of proposed modification. The Bank, its directors, officers and employees shall follow the revised written loan policy and/or any subsequent modification thereto.

   (i) appraisal guidelines for the financing, purchasing, and foreclosure of real estate, consistent with Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323; and
   (ii) guidelines for obtaining new or updated appraisals for problem real estate loans and other real estate.

[.9] 8. (a) Within ninety (90) 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 may be a part of the Capital Plan and 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. Within thirty (30) days from the effective date of this ORDER, the Bank shall revise its written investment policy to include quality standards for unrated investments, prudent investment limitations for equity securities, maturity standards for eligible investments, and guidelines for mortgage derivative and other asset backed products consistent with the FDIC's Supervisory Policy Statement on Securities Activities adopted on December 30, 1991. The written investment policy shall be submitted to the Regional Director and the Commissioner for review and comment within such thirty-day period. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after the such submission, the Board of Directors shall approve the written investment 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 investment policy may be made only after giving the Regional Director and the Commissioner written notice of the proposed modification, and after consideration of any responsive 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 investment policy and/or any subsequent modification thereto.

   [.11] 10. The Bank shall not pay or declare any cash dividends on its capital stock without the prior written consent of the Regional Director and the Commissioner.

   [.12] 11. 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 quarterly earnings release, 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 {{9-30-92 p.C-2498}}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.

[.13] 12. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall correct the remediable technical exceptions noted on pages 2-d through 2-d-2 of the Examination.
   (b) Within sixty (60) days from the effective date of this ORDER, the Bank shall formulate and implement a plan designed to reduce that industry concentration in excess of one hundred (100.0) percent of the Bank's Tier 1 capital 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. Such industry concentration shall not be deemed to include (i) loans to individuals for construction of their own homes or (ii) loans to builders for the construction of "pre-sold" homes where take-out financing is in place.
   (c) Within sixty (60) days from the effective date of this ORDER, the Bank shall prepare and submit to the Regional Director and the Commissioner a response to the cited deficiencies in the loans listed for "Special Mention" on pages 2-c and 2-c-1 of the Examination.

[.15] 14. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall review all internal routine and controls matters as noted on pages 6-a through 6-a-4 of the Examination, and take corrective action where appropriate. This review shall include, as a minimum:

   (i) a determination by the audit committee of the Board of Directors of the adequacy, scope, and independent of the Bank's external audit;
   (ii) if not previously accomplished, a review of all other real estate sales transactions since April 17, 1990, to assure conformity with Financial Accounting Standards Number ("FASB") 15, FASB 66, and Accounting Principals Board Opinion Number 21; and
   (iii) a review of the Bank's accounting systems with regard to excess mortgage servicing rights, split dollar life insurance premiums, leases, and in-substance foreclosure of real estate.

   (b) Upon completion of the aforementioned review, the Bank shall submit a summary of its findings to the Regional Director and Commissioner for review and comment. The Bank shall amend any Report of Condition and Income as needed.