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FDIC Enforcement Decisions and Orders

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   [10,015] In the Matter of Regent Thrift and Loan Association, San Francisco, California, Docket No. FDIC-89-200b (10-27-89).

   Thrift ordered to cease and desist from practices such as hazardous lending; operating with inadequate equity capital and reserves in relation to the volume and quality of assets, with inadequate liquidity and fund management, with inadequate internal routine and control policies, in a manner to produce large operating losses, and with employment agreements providing for excessive compensation to senior executive officers; and violating applicable federal and state laws.

   [.1] Board of Directors—Merger or Sale—Review
   [.2] Board of Directors—Strategic Plan—Review
   [.3] Management—Qualifications—Compliance
   [.4] Primary Capital—Increase—Methods
   [.5] Assets—Adversely Classified—Reduce
   [.6] Loan Policy—Revision—Minimum Requirements
   [.7] Violations of Law—Eliminate and/or Correct—Compliance
   [.8] Asset/Liability Management Policy—Minimum Requirements—Review
   [.9] Bank Operations—Written Policy—Review
   [.10] Financial Condition—Consolidated Report of Condition—Amendment
   [.11] Holding Company—Tax Allocation and Fees Policy—Review
   [.12] Shareholders—Dividends—Approval
   [.13] Employment Agreements—Rescind
   [.14] Shareholders—Disclosure—Cease and Desist Order
   [.15] Compliance—Progress Reports—Frequency

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In the Matter of

REGENT THRIFT AND LOAN
ASSOCIATION

SAN FRANCISCO, CALIFORNIA
(Insured State Nonmember Thrift)
ORDER TO CEASE AND DESIST

   Regent Thrift and Loan Association, San Francisco, California ("Thrift"), 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 Thrift and of its right to a hearing on the 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"), October 17, 1989, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and/or regulations, the Thrift 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 Thrift had engaged in unsafe or unsound banking practices and had committed violations of law 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 Thrift, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of affairs of the Thrift, cease and desist from the following unsafe or unsound banking practices and violations:
   (a) following hazardous lending practices;
   (b) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Thrift;
   (c) operating with inadequate provisions for liquidity and funds management;
   (d) operating with inadequate routine and controls policies;
   (e) operating in such a manner as to produce large operating losses;
   (f) operating in violation of section 7(j)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1817(j)(1); sections 326.2, 326.4(a), 326.4(b), and 326.5(a), 350.3(a), 350.4(d), and 350.7(b) of the FDIC Regulations, sections 18210(c), 18269, 18271, 18317, 18320, 18346 and 18415.3 of the California Financial Code; and title 10 section 1133(b) of the California Code of Regulations;
   (g) operating with employment agreements between the Thrift and senior executive officers which provide for excessive compensation or bonuses and excessive payments in the event of a sale, or change in controlling interest, or merger of the Thrift.
   IT IS FURTHER ORDERED that the Thrift take affirmative action as follows:

   [.1][.2] 1. Within 30 days from the effective date of this ORDER, the board of directors shall determine whether the Thrift shall remain an independent institution or seek a merger with or sale to a qualified candidate. If the decision is made to sell or merge within 30 days of the effective date of this ORDER, the board of directors shall adopt a definitive schedule, including specific dates, in which to accomplish such sale or merger. If the decision is made to remain independent, within 90 days from the effective date of this ORDER, the Thrift shall formulate and implement a written strategic plan ("strategic plan"). The strategic plan shall be forwarded to the Regional Director of the San Francisco Regional Office ("Regional Director") and to the California Department of Corporations ("Commissioner") for review, and shall address, at a minimum, the following:
   (a) a business plan incorporating goals for the operation of the Thrift, including:

       (i) the line or lines of business the Thrift will pursue;
       (ii) an identification of the personnel, computer support and accounting controls necessary for each line of business; and
       (iii) an identification and analysis of the risks and costs versus benefits and potential of each line of business.
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   (b) strategies for implementing the business plan and improving and sustaining the earnings of the Thrift, including:
       (i) an identification of the major areas in, and means by which, the board of directors will seek to improve the Thrift's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Thrift to compare actual figures with budgetary projections;
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components; and
       (v) an assessment of the level of capital necessary to provide for profitable operations of the Thrift.
   (c) coordination of the Thrift's loan, investment, and operating policies, and budget and profit planning, with the funds management policy:
   (d) during the life of this ORDER, the board of directors shall annually review the strategic plan at a board meeting at which all directors are in attendance. Any changes in the Thrift's goals or strategies shall be reflected in a modification of the strategic plan. Any modifications to the Thrift's strategic plan shall be submitted to the Regional Director and the Commissioner for review.

   [.3] 2. (a) The Thrift 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 Thrift.
   (b) The qualifications of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER;
       (ii) operate the Thrift in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
       (iv) restore all aspects of the Thrift to a safe and sound condition, including capital adequacy, earnings, management effectiveness, and liquidity.
   (c) During the life of this ORDER, the Thrift shall notify the Regional Director and the Commissioner in writing when it proposes to add any individual to the institution's board of directors or employ any individual as a senior executive officer. The notification must be received at least 30 days before such addition or employment is intended to become effective and should include a description of the background and experience of the individual(s) to be added or employed.
   (d) The Thrift may not add any individual to its board of directors or employ any individual as a senior executive officer if the FDIC issues a notice of disapproval pursuant to section 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101–73 § 914, 103 Stat. 183 (1989).

   [.4] 3. (a) By October 3, 1989, the Thrift shall have adjusted primary capital of the greater of ten (10.0) percent of the Thrift's adjusted Part 325 total assets or the amount necessary to comply with Section 18320 of the California Financial Code. Thereafter, during the life of this ORDER, the Thrift shall maintain adjusted primary capital equal to the greater of ten (10.0) percent of the Thrift's adjusted Part 325 total assets or the amount necessary to comply with Department of Corporations regulations. Primary capital and Part 325 total assets utilized shall be calculated in accordance with prevailing instructions for the preparation of Reports of Condition. The computation of adjusted primary capital and the ratio of adjusted primary capital to adjusted Part 325 total assets shall be determined by using the procedures outlined in the "Analysis of Capital and Reserves" schedule in the FDIC Report of Examination.
   (b) Any increase in primary capital necessary to meet the requirements of Paragraph 3 of this ORDER may be accomplished by the following:

       (i) the sale of common stock; or
       (ii) the sale of perpetual preferred stock; or
       (iii) the direct contribution of cash by the board of directors, shareholders, and/or parent-bank holding company; or
       (iv) the collection of assets previously charged off; or
       (v) any other means acceptable to the Regional Director and the Commissioner; or
       (vi) any combination of the above means.
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   (c) If all or part of any increase in primary capital required by Paragraph 2 of this ORDER is accomplished by the sale of new securities, the board of directors shall forthwith take all necessary steps to adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Thrift's securities (including a distribution limited only to the Thrift's existing shareholders), the Thrift shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Thrift and the circumstances giving rise to the offering and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation of the plan and, in any event, not less than fifteen (15) days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429, for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination. If the increase in primary capital is provided by the sale of preferred stock, then all terms and conditions of the issue, including but not limited to those terms and conditions relative to interest rate and convertibility factor, shall be presented to the Regional Director and the Commissioner for prior approval.
   (d) In complying with the provisions of Paragraph 3 of this ORDER, the Thrift shall provide to any subscriber and/or purchaser of the Thrift's securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Thrift securities. The written notice required by this paragraph shall be furnished within ten (10) days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Thrift's securities who received or was tendered the information contained in the Thrift's original offering materials.
   (e) For the purposes of this ORDER, the terms "primary capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, respectively subsections 325.2(h) and 325.2(k) (12 C.F.R. §§ 325.2(h) and 325.2(k)).

   [.5] 4. Within 10 days from the effective date of this ORDER, the Thrift shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of May 31, 1989, that have not been previously collected or charged off.

   [.6] 5. (a) Within 60 days from the effective date of this ORDER, the Thrift shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Thrift's lending function, which policies shall include specific guidelines for placing loans on a non-accrual basis. In addition, the Thrift shall obtain adequate and current documentation for all loans in the Thrift's loan portfolio. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
   (b) The initial revisions to the Thrift's loan policy and practices, required by this paragraph, at a minimum, shall include the following:

       (i) provisions, consistent with FDIC instructions for the preparation of Reports of Condition and Income, under which the accrual of interest income is discontinued and previously accrued interest is reversed on delinquent loans;
       (ii) provisions which prohibit the capitalization of interest or loan related expense unless the board of directors supports in writing and records in the minutes of the corresponding board of directors meeting why an exception thereto is in the best interests of the Thrift;
       (iii) provisions which require complete loan documentation, realistic repayment terms and current credit information adequate to support the outstanding indebtedness of the borrower. Such documentation shall include current financial information, profit and loss statements or copies of tax returns and cash flow projections;
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       (iv) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values;
       (v) provisions which establish minimum qualifications for independent real estate appraisers and specify the circumstances and conditions under which real estate appraisals must be conducted by independent appraisers;
       (vi) provisions which establish standards for unsecured credit;
       (vii) provisions which establish officer lending limits;
       (viii) provisions that require extensions of credit to any of the Thrift's executive officers, directors, or principal shareholders, or to any related interest of such persons, to be approved in advance by a majority of the entire board of directors in accordance with section 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. § 215.4(b));
       (ix) provisions that directors first determine that the lending staff has the expertise necessary to properly supervise construction loans and that adequate procedures are in place to monitor any construction involved before funds are disbursed;
       (x) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $50,000 which warrant individual review and consideration by the board of directors as determined by the loan committee or active management. The loan "watch list" shall be presented to the board of directors for review at least monthly with such review noted in the minutes; and
       (xi) the board of directors shall adopt procedures whereby officer compliance with the revised loan policy is monitored and responsibility for exceptions thereto assigned. The procedures adopted shall be reflected in minutes of a board of directors meeting at which all members are present and the vote of each is noted.

   [.7] 6. Within 60 days from the effective date of this ORDER, the Thrift shall eliminate and/or correct all violations of law which are more fully set out on page 6-a through 6-a-2 of the FDIC Report of Examination of the Thrift as of May 31, 1989. In addition, the Thrift shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.8] 7. (a) Within 60 days from the effective date of this ORDER, the board of directors shall develop a comprehensive asset/liability management policy. The policy shall establish standards consistent with generally accepted prudent banking operations by giving specific consideration to:

       (i) establishing a range for the Thrift's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination, and which ratio shall, within 180 days from the effective date of this ORDER, be reduced to not more than ten (10.0) percent; and within 360 days from the effective date of this ORDER, be reduced to not more than zero (0.0) percent. The requirements of this paragraph shall not be construed as standards for future operations, and the Thrift's volatile liability dependency ratio shall be maintained at a level consistent with prudent banking practices;
       (ii) establishing a range for short-term investments to potentially volatile liabilities, as those terms are defined by the FDIC in its current edition of "A Users Guide for the Uniform Bank Performance Report";
       (iii) establishing maturity ranges for the Thrift's investment portfolio.
       (iv) establishing acceptable ranges for the Thrift's rate sensitivity and gap rations; and
       (v) the establishing of an asset/liability committee, including a description of its responsibilities, how often it will meet, how it will obtain information and guidance from the board of directors, and how its activities will be reported to the board of directors.

   [.9] 8. Within 60 days from the effective date of this ORDER, the Thrift shall adopt and implement a policy for the operation of the Thrift in such a manner as to provide internal routine and controls consistent with safe and sound banking practices. Such policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.10] 9. Within 10 days after eliminating from its books any asset in compliance with Paragraph 3 of this ORDER, the Thrift shall file with the FDIC amended Consolidated Reports of Condition and Income {{5-31-92 p.C-75}}which shall accurately reflect the financial condition of the Thrift as of December 31, 1988 and March 31, 1989. Thereafter, during the life of this ORDER, the Thrift shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Thrift as of the end of the period for which the Reports are filed, including any adjustment in the Thrift's books made necessary or appropriate as a consequence of any State of California or FDIC examination of the Thrift during that reporting period.

   [.11] 10. Within 60 days from the effective date of this ORDER, the Thrift shall develop, adopt, and implement a written policy satisfactory to the Regional Director and the Commissioner, which policy shall govern the relationship between the Thrift and its holding company as to tax allocation and other matters, and shall limit the payment of any management, consulting, or other fees or funds of any nature, directly or indirectly, to or for the benefit of the Thrift's holding company to only those fees or funds paid in connection with services performed by the Thrift's holding company on behalf of or for the benefit of the Thrift.

   [.12] 11. The Thrift shall not pay cash dividends in any amount except as follows:

       (a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
       (b) that after payment of such dividends, the ratio of primary capital to total assets of the Thrift will be not less than the level required by Paragraph 2 of this ORDER;
       (c) that such declaration and payment of dividends shall be approved in advance by the board of directors; and
       (d) that such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director and the Commissioner, which approval shall not be unreasonably withheld.

   [.13] 12. The Thrift shall rescind the November 2, 1987 Employment Agreement between the Thrift, its holding company and Peter Lew at least insofar as that agreement, in Paragraph 3(c) provides for an unwarranted scheme of bonuses to be paid to Mr. Lew; and in Paragraph 3(h) provides for a $500,000 payment to Mr. Lew in the event of a sale or change in controlling interest or merger of the Thrift.
   13. The Thrift shall rescind the November 2, 1987 Employment Agreement between the Thrift, its holding company and Robbin Tom at least insofar as that agreement, in Paragraph 3(c) provides for an unwarranted scheme of bonuses to be paid to Ms. Tom; and in Paragraph 3(h) provides for a $500,000 payment to Ms. Tom in the event of a sale or change in controlling interest or merger of the Thrift.

   [.14] 14. Following the effective date of this ORDER, the Thrift shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Thrift's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Thrift'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 Unit, Washington, D.C. 20429, at least fifteen (15) 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.

   [.15] 15. Within 30 days of the end of the first quarter following the effective date of this ORDER, and within thirty (30) days of the end of each quarter thereafter, the Thrift shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports shall include a copy of the Thrift's Report of Condition and the Thrift's Report of Income. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner have released the Thrift in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Thrift, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Thrift.
   This ORDER shall become effective ten (10) days from the date of its issuance.
   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 mod {{5-31-92 p.C-76}}ified, terminated, suspended, or set aside by the FDIC.
   Pursuant to delegated authority.
   Dated in San Francisco, California, this 27th day of October, 1989.

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