Federal Deposit
Insurance Corporation

{{2-28-93 p.C-709}}
   [¶10,154] In the matter of Heritage Bank for Savings, Holyoke, Massachusetts, Docket No. FDIC-90-273b (12-19-90).

   Bank to cease and desist from operating with inadequate capital; operating with an excessive level of volatile liability dependence; and failing to maintain adequate liquidity. (This order was terminated by order of the FDIC dated 12-18-92; see ¶15,570.)

   [.1] Capital—Primary Capital—Increase/Maintain—Methods
   [.2] Assets—Adversely Classified—Eliminate/Reduce
   [.3] Loans—Risk Position—Written Plan—Minimum Requirements— Review
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Loans—Accrual of Interest—Restrictions
   [.6] Loans—Collections Policy
   [.7] Loans—Classified "Loss"—Charge off
   [.8] Allowance for Loan and Lease Losses—Maintain
   [.9] Loan Policy—Minimum Requirements—Review
   [.10] Profit Plan—Minimum Requirements—Review
   [.11] Liquidity Ratio—Written Plan Required
   [.12] Liabilities—Volatile—Reduce—Written Plan Required
   [.13] Brokered Deposits—Restricted
   [.14] Dividends—Restricted
   [.15] Compliance—Progress Reports—Frequency

In the Matter of

HERITAGE BANK FOR SAVINGS
HOLYOKE, MASSACHUSETTS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Heritage Bank for Savings, Holyoke, Massachusetts, ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and the violation of regulation 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 (the "Act"), {{2-28-93 p.C-710}}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 December 12, 1990, whereby solely for the purpose of settling this proceeding and without admitting any allegations or implication of fact or existence of any unsafe or unsound practice, violation of regulation, or other ground for issuance of an order under section 8(b) of the Act, 12 U.S.C. § 1818(b), 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 regulation. 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) of the Act, 12 U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices:

   (a) operating with inadequate primary and total capital for the kind and quality of assets held, in violation of Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325;
   (b) operating with an excessive level of volatile liability dependence, and
   (c) failing to maintain adequate liquidity to support funding needs.

   [.1] 1. (a) The Bank shall increase adjusted primary capital to eight (8.00) percent of the Bank's adjusted Part 325 total assets. The means and timing of achieving such increase in the capital ratio shall be embodied in a written plan to be submitted to the Regional Director of the FDIC's Boston Regional Office ("Regional Director") and the Commissioner of Banks of the Commonwealth of Massachusetts ("Commissioner") for review and approval within ninety (90) day from the effective date of this ORDER. Thereafter, as long as this ORDER remains in effect, the Bank shall maintain adjusted primary capital in an amount as to equal eight (8.00) percent of the Bank's adjusted Part 325 total assets. The determination of primary capital, adjusted primary capital, total capital, Part 325 total assets, ad the ratio of adjusted primary capital to adjusted Part 325 total assets shall be calculated by utilizing the procedures outlined in the "Analysis of Capital" schedule in the standard FDIC Report of Examination form in effect as of the date of the issuance of this ORDER.
   (b) Any increase in adjusted primary capital necessary to meet the requirements of paragraph 1 of this ORDER may be accomplished by:

   (i) the sale of new offerings of common stock, perpetual preferred stock mandatory convertible debt (to the extent of twenty (20) percent of primary capital exclusive of such debt), or any other type of instrument deemed to constitute primary capital under Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. § 325;
   (ii) the sale or transfer of outstanding shares by the Bank's shareholders to individuals or entities who or which will contribute all or part of the additional 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 March 16, 1990, without loss or liability to the Bank, or (B) "Doubtful" as of March 16, 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 8 of this ORDER indicates that such allowance has a balance in excess of that required for

   (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.

   [.3] 3. (a) Within thirty (30) days from the effective date of this ORDER, the Board of Directors or the Bank's Asset Quality Committee ("Committee"), which shall consist exclusively of outside directors, shall develop a written plan of action to lessen the Bank's risk position with respect to each borrower who or which had an outstanding principal balance of debt owing to the Bank aggregating $400,000 or more, which was classified "Substandard" or "Doubtful" in whole or in part as of March 16, 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.

   [.4] 4. The Bank shall not extend, directly, or indirectly with knowledge, or renew credit to, or for the benefit of, any borrower who or which had a loan(s) or other extension(s) of credit with the Bank aggregating $400,000 or more that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," in the Examination and is uncollected, unless a majority of the Bank's Board of Directors or the Committee 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 3 of this ORDER as to such borrower, and (3) approves such advance. A written record of the Board of Directors' or the Committee's determination and approval of any advance under the terms of this paragraph 4 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the Board of Directors or the Committee. Nothing in this ORDER shall be construed to prevent the Bank from honoring binding and legally enforceable obligations existing before the issuance of this ORDER.

   [.5] 5. 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 5, "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 ("Instructions") in effect as of the date of the issuance of this ORDER. 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.

   [.6] 6. Within ninety (90) days from the effective date of this ORDER, the Bank shall develop and implement a loan collections policy designed to reduce the level of "overdue loans and leases", as that term is used in the Instructions, to an amount representing less than six (6.0) percent of gross loans and leases. The Bank, its directors, officers, and employees shall follow the loan collections policy and/or any subsequent modification thereto.

   [.7] 7. The Bank shall charge off loans or any portions thereof classified "Loss" which have been identified internally through the Bank's loan review process immediately upon a final determination of such classification. Reasons for any exceptions to this policy shall be detailed in the loan file, with concurrence by the Committee noted in the minutes of a meeting thereof.

   [.8] 8. (a) The Bank shall maintain through at least quarterly charges to income an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions.
   (b) The Bank shall review the Reports of Condition and Income submitted by the Bank between and including June 30, 1990 and the effective date of this ORDER, and shall determine whether such Reports reflect an allowance for loan and lease losses in an amount at least as large as the allowance indicated for such Call Report date by the Instructions. If necessary to comply with this paragraph 8(b), the Bank shall file amended Reports of Condition and Income reflecting an allowance for loan and lease losses in an amount at least equal to the amount indicated for such Call Report date by the Instructions within ten (10) days from the effective date of this ORDER.
   (c) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the Board of Directors or the Committee 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) cause the allowance to be accurately reported in any such Report of Condition and Income. The minutes of the Board or Committee 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.

   [.9] 9. Within ninety (90) days from the effective date of this ORDER, the Bank shall revise its written loan policy to include provisions addressing the following:
   (a) requirements of Regulation O regarding loans to directors and executive officers;
   (b) collection procedures;
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   (c) loans to real estate trusts;
   (d) procedures for internal review of appraisals;
   (e) guidelines encompassing participation loans, reappraisal requirements, and in-substance foreclosure; and
   (f) expanded guidelines for floor plan lending. The revised written loan policy shall be submitted to the Regional Director and the Commissioner for review and comment. At its next regularly scheduled meeting, at least 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 comments received from the Regional Director and/or the Commissioner, 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, and after consideration of any responsive comments submitted by the Regional Director and 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.

   [.10] 10. (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] 11. Within ninety (90) days from the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner, with said plan reflecting the means and timing by which the Bank shall achieve and maintain a "Liquidity Ratio" of at least fifteen (15.0) percent. The method for computing and measuring the "Liquidity Ratio" is contained in the schedule "Liquidity Ratio and Dependency Ratio", page 5-a of the FDIC Report of Examination as of March 16, 1990. The written liquidity plan may be incorporated into the capital plan required under paragraph 1 of this ORDER. The target Liquidity Ratio called for in this paragraph 11 is not to be construed as a benchmark for the future, but rather as a minimum ratio for compliance with this ORDER. The Board will continue to strive to improve the Bank's Liquidity Ratio to a level above fifteen (15.0) percent.

   [.12] 12. Within ninety (90) days from the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner, with said plan reflecting the means and timing by {{2-28-91 p.C-714}}which the Bank shall achieve and maintain a ratio that restricts reliance upon volatile liabilities to fund long term earning assets to less than twelve (12.0) percent ("Dependency Ratio"). The method for computing the Dependency Ratio is contained in the schedule "Liquidity Ratio and Dependency Ratio", page 5-a of the FDIC Report of Examination as of March 16, 1990. The written dependency plan may be incorporated in the capital plan required under paragraph 1 of this ORDER. The target Dependency Ratio called for in this paragraph 12 is not to be construed as a benchmark for the future, but rather as a minimum ratio for compliance with this ORDER. The Board will continue to strive to further improve the Bank's Dependency Ratio toward a goal of at least five (5.0) percent.

   [.13] 13. In accordance with section 29 of the Act, 12 U.S.C. § 1829, and section 337.6 of the FDIC Rules and Regulations, 12 C.F.R. § 337.6, the Bank will not accept, renew, or rollover brokered deposits, except in conformity with the conditions and requirements of a waiver granted by the FDIC, until the requirements set forth in paragraph 1 of this ORDER have been achieved.

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

   [.15] 15. Within forty-five (45) days from December 31, 1990, and, thereafter, within forty-five (45) 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 achieve and maintain 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 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 Commissioner.
   This ORDER supersedes and replaces the Memorandum of Understanding, dated July 14, 1989, among the Board of Directors of the Bank, the Regional Director, and the Commissioner, which is of no further force or effect.
   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 19th day of December 1990.

CRITICIZED ASSET REPORT AS OF:
___________________________________________________________________________
BORROWER(S):
___________________________________________________________________________
LOAN BALANCE(S) AND RATING CRITICISM (SPECIAL MENTION, SUBSTANDARD, DOUBTFUL OR LOSS):
CLASSIFIED LOAN BALANCE(S):$_____
PRESENT LOAN BALANCE(S): $_____
CRITICISM_____
AMOUNT CHARGED OFF TO DATE_____
FUTURE POTENTIAL CHARGE-OFF_____ {{12-31-91 p.C-715}}
___________________________________________________________________________
PRESENT STATUS^*(Include past due status, nonaccrual, significant progress of collection, deterioration, etc.):
___________________________________________________________________________
FINANCIAL AND/OR COLLATERAL SUPPORT (Include brief summary of most current financial info, appraised value of collateral and/or estimated value and date thereof, bank's lien position and amount of available equity, if any, guarantor(s) info, etc.):
___________________________________________________________________________
PROPOSED PLAN OF ACTION TO ELIMINATE ASSET CRITICISM(S) AND TIME-FRAME FOR ITS ACCOMPLISHMENT:
___________________________________________________________________________
IDENTIFIED SOURCE OF REPAYMENT AND DEFINED REPAYMENT PROGRAM
(Repayment program should coincide with source of repayment):
___________________________________________________________________________
Use this form for reporting each criticized asset which exceeds four hundred thousand dollars ($400,000) and retain the original in the credit file for review by the examiners. Submit your reports quarterly, in writing, until notified otherwise by the FDIC Regional Director and the Commissioner.
^*Any increase in the loans should be fully explained in the PRESENT STATUS section.