Federal Deposit
Insurance Corporation

{{4-30-91 p.C-807}}
   [¶10,179] In the Matter of New Heritage Bank, Lawrence, Massachusetts, Docket No. FDIC-91-43b (2-12-91).

   Bank to cease and desist from operating with an excessive volume of adversely classified assets; engaging in hazardous lending practices; engaging in violations of laws and regulations; engaging in management policies which are detrimental to the Bank; failing to operate with adequate loan documentation; engaging in practices which produce inadequate operating income and excessive loan losses; failing to provide adequate supervision over Bank's affairs; operating with inadequate allowance for loan and lease losses; failing to submit reports as required; and operating without proper internal routine and controls.
   [.1] Management—Qualifications
   [.2] Management—Management Plan—Minimum Requirements—Review
   [.3] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.4] Board of Directors—Election—Independent Directors
   [.5] Board of Directors—Meetings—Frequency—Written Records Required
   [.6] Assets—Adversely Classified—Reduce/Eliminate
   [.7] Capital—Capital Plan—Review
   [.8] Primary Capital—Increase/Maintain—Methods
   [.9] Allowance for Loan and Lease Losses—Maintain—Report
   [.10] Loans—Risk Position—Reduce—Written Plan Required
{{4-30-91 p.C-808}}
   [.11] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.12] Loans—Accrual of Interest—Overdue
   [.13] Loan Policy—Written Revisions Required—Review
   [.14] Profit Plan—Written Plan—Minimum Requirements—Review
   [.15] Funds Management—Written Policy—Minimum Requirements— Review
   [.16] Dividends—Restricted
   [.17] Shareholders—Disclosure—Cease and Desist Order
   [.18] Technical Exceptions—Correct
   [.19] Violations of Law—Eliminate/Correct
   [.20] Ethics—Conflicts of Interest—Written Policy Required—Review
   [.21] Compliance—Progress Reports—Frequency

In the Matter of
NEW HERITAGE BANK LAWRENCE, MASSACHUSETTS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   New Heritage Bank, Lawrence, Massachusetts ("Bank"), having been advised of its rights 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 February 6, 1991, whereby solely for the purpose of settling this proceeding and without admitting or denying any allegations or implications of fact or the existence of any unsafe or unsound banking practices, violations of law and/or regulations, or any other ground for the issuance of an order under section 8(b) of the Act, 12 U.S.C. § 1818(b), the Bank consented to the issuance of this 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 hazardous lending practices, including maintaining an excessive volume of adversely classified loans;
   (c) engaging in violations of applicable laws and regulations, specifically Part 403 of the Government Security Act, Massachusetts Commissioner's Regulation 209 CMR 4.01, and Chapter 167E, Section 6 of Massachusetts General Laws;
   (d) engaging in management policies and practices which are detrimental to the Bank;
   (e) failing to operate with adequate loan documentation, including but not limited to current financial statements, insurance coverage, rent rolls, and cash flow and/or operating information;
   (f) engaging in practices which produce inadequate operating income and excessive loan losses:
   (g) failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and/or regulations;
   (h) operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans held;

   (i) failing to submit Reports of Condition and Income in accordance with prevailing instructions;
   (j) operating without proper internal routine and controls.

   [.1] 1. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall have and retain qualified management. Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications of management shall be assessed on its ability to take effective action toward the accomplishment of the following goals:

   (i) compliance with the requirements of this ORDER,
   (ii) operation of the Bank in a safe and sound manner,
   (iii) compliance with applicable laws and regulations, and
   (iv) restoration of 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 Boston Regional Office ("Regional Director") and the Commissioner of Banks of the Commonwealth of Massachusetts ("Commissioner") of any changes in management. The changes in management subject to this provision are those changes which are subject to the requirements of section 303.14 of the FDIC's Rules and Regulations, 12 C.F.R. § 303.14. 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.

   [.2] (b) In order to have qualified 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 at the level of vice president or above 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 at the level of vice president or above, 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 lending, investment and operating policies of the Bank sufficient to ensure that the Bank complies with the provisions of this ORDER.

   [.4] (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 use reasonable best efforts to nominate and support the election of candidates to the Board of Directors who are independent with respect to the Bank. The goal of each shareholder meeting shall be to add sufficient members to the Board of Directors so that a majority of the Board of Directors will be and remain independent with respect to the Bank.
   (iii) For purposes of this ORDER, an individual who is "independent with respect to the Bank" shall be any individual (1) who is not an officer of the Bank or any of its affiliated organizations 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 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 five (5.0) percent of the Bank's total equity capital and allowance for loan and lease losses.

   [.5] (e) The Bank's Board of Directors shall meet at least monthly. The Board shall prepare in advance and shall follow a detailed written agenda at each meeting, which shall include consideration of actions of any committees. A chronological file of all written agendas shall be maintained. Notwithstanding the foregoing, the Board shall not be precluded from considering matters other than those contained in the agenda. Detailed written minutes of all Board meetings shall be maintained and recorded on a timely basis.

   [.6] 2. Within ten (10) days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" as of June 18, 1990; and fifty (50.0) percent of those assets or portions of assets classified "Doubtful" as of June 18, 1990 which have not been previously collected or charged off. Reduction of these assets through use of proceeds of loans made by the bank does not constitute "collection" or "elimination" for the purpose of this paragraph.

   [.7,.8] 3. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall submit a Capital Plan to the Regional Director and the Commissioner for approval. The Capital Plan shall address both internal and external sources of capital augmentation, including capital infusions, retention of earnings, restriction of asset growth, and asset sales with a goal of increasing the Bank's ratio of primary capital to total assets ("primary capital ratio") to at least ten (10.0) percent, with stated timetables within which to attain this goal. Upon approval by the Regional Director and the Commissioner, the Bank shall immediately implement the written plan. For purposes of this ORDER, the terms "primary 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 the date of this ORDER ("Part 325"). Nothing in this paragraph shall preclude the FDIC from bringing any action against the Bank for violation of Part 325.
   (b) If, during the period this ORDER is in effect, the ratio specified in paragraph 3(a) reaches ten (10.0) percent and subsequently declines below ten (10.0) percent, the Bank, within forty-five (45) days after the end of the month during which the said ratio so declined, shall submit a written plan to the Regional Director and the Commissioner for increasing such ratio up to or in excess of ten (10.0) percent {{4-30-91 p.C-811}}as soon as practicable after the written plan is implemented. Thereafter, the Bank shall continue to maintain its primary 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.
(c) Any increase in primary capital made by the Bank in order to meet the requirements of paragraph 3 may be accomplished by:

   (i) the sale of common or perpetual preferred stock;
   (ii) the sale of existing shares by the Bank's shareholders to individuals who will contribute to the required increase in primary capital to the Bank;
   (iii) the direct contribution of cash by the shareholders and/or directors of the Bank;
   (iv) the collection of all or part of assets classified: (A) "Loss" as of June 18, 1990, without loss or liability to the Bank, or (B) "Doubtful" as of June 18, 1990, without loss or liability to the Bank, provided any collection on such assets shall first be applied to that portion of the asset 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 allowance for loan and lease losses ("allowance") and, if the Board of Directors' review of the adequacy of the allowance required by paragraph 4 of this ORDER indicates that such allowance has a balance in excess of that required for adequacy, any such excess may be transferred to equity capital through a negative provision for loan and lease losses;
   (v) the collection in cash of assets previously charged off;
   (vi) any combination of the above means; or
   (vii) any other means acceptable to the Regional Director and the Commissioner.

   [.9] 4. (a) The Bank shall maintain an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income ("Instructions").
   (b) Prior to the submission of any Report of Condition and 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 allowance for loan and lease losses, (2) provide for an adequate allowance, and (3) accurately report the allowance in any such Reports 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 allowance, and the basis for determining the amount of allowance provided.

   [.10] 5. (a) Within thirty (30) days from the effective date of this ORDER, the Board of Directors shall develop a written plan of action to lessen the Bank's risk position with respect to each borrower who or which had outstanding principal debt owing to the Bank in excess of $250,000 which was classified "Substandard" or "Doubtful," in whole or in part, as of June 18, 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.

   [.11] 6. The Bank shall not extend or renew, directly or indirectly, credit to, or for the benefit of, any borrower who has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected, unless (a) the Bank is obligated to made the advance by a binding, enforceable contract that is in force at the date of this ORDER and was in force on June 18, 1990; or (b) 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 5 of this ORDER as to such borrower, and (3) gives approval for such advance individually or by approving a schedule or project {{4-30-91 p.C-813}}budget with which the advance is consistent. A written record of the Board of Directors' determination and approval of any advance under the terms of this paragraph 6 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the Board of Directors.

   [.12] 7. 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 7, "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.

   [.13] 8. Within sixty (60) days from the effective date of this ORDER, the Bank shall expand its written loan policy to address loan documentation requirements for construction loan disbursements, income producing properties, the timely receipt and maintenance of borrower personal and business financial statements and cash flow information, and real estate appraisal standards and procedures. The revised written loan policy shall be submitted to the Regional Director and the Commissioner for review and comment. 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 written 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, and after consideration of any responsive comments submitted by either the Regional Director 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 policies and/or any subsequent modification thereto.

   [.14] 9. (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 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.

   [.15] 10. (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 {{4-30-91 p.C-814}}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, including the formation of an Asset/Liability Management Committee:
   (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.

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

   [.17] 12. 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. In the event that the notice or proxy statement constitutes the next shareholder communication, it will be sufficient to describe the ORDER only in such notice or proxy statement. 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.

   [.18] 13. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall correct the remediable technical exceptions on loans noted on page 2-d of the FDIC's Report of Examination of the Bank as of June 18, 1990.
   (b) Within (60) days from the effective date of this ORDER, the Bank shall correct the remediable cited deficiencies in the loans listed for "Special Mention" on pages 2-b of the FDIC's Report of Examination of the Bank as of June 18, 1990.
   (c) Within ninety (90) days from the effective date of this ORDER, the Bank shall correct the remediable internal routine and controls deficiencies noted on pages 6-b of the FDIC's Report of Examination of the Bank as of June 18, 1990. Corrections shall include but not be limited to the development of an internal audit program and the designation of a full-time or part-time internal auditor or outside audit consultant.

   [.19] 14. Within sixty (60) days from the effective date of this ORDER, the Bank shall eliminate and/or correct all remediable violations of law and regulations committed by the Bank as described on pages 6-a of the FDIC's Report of Examination of the Bank as of June 18, 1990.

   [.20] 15. Within sixty (60) days from the effective date of this ORDER, the Bank shall develop a written ethics policy which shall specifically address conflicts of interest and preferential treatment between and among employees, officers, the Board of Directors, and related interests. The written ethics policy shall be submitted to the Regional Director and the Commissioner for review and comment. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board {{4-30-91 p.C-815}}of Directors shall approve the written ethics policy, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers and employees shall adhere to the provisions of the written ethics policy.

   [.21] 16. Within thirty (30) days from the end of each calendar quarter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof. The written progress reports shall include the most recent criticized asset report (Exhibit A) referred to in Paragraph 5. In addition, the Bank shall furnish such reports on request of the Regional Director or the 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.
   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 12th day of February, 1991.