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[¶10,031] In the Matter of City Thrift and Loan Association, Los Angeles, California, Docket No. FDIC-89-223b (12-11-89).
Bank to cease and desist from practices such as following hazardous and lax collection practices; and operating with inadequate equity capital and reserves in relation to the volume of book quality assets held, with a large volume of poor quality loans, with an inadequate loan valuation reserve, with inadequate provisions for liquidity and funds management, and with inadequate routine and controls policies. (This order was terminated by order of the FDIC dated 10-13-92; see ¶ 15,535.)
[.1] Management—Qualifications—Compliance
[.2] Board of Directors—Increase—Qualifications
[.3] Primary Capital—Increase—Methods
[.4] Assets—Adversely Classified—Reduce
[.5] Loans—Extension of Credit—Curtail—Exceptions
[.6] Loans—Interest Accrual—Exception
[.7] Loan Policy—Minimum Requirements—Review
[.8] Loan Loss Reserve—Adequacy—Review
[.9] Business Plan—Minimum Requirements—Review
[.10] Violations of Law—Eliminate and/or Correct
[.11] Liquidity and Funds Management—Written Policy—Review
(Next page is C-153.)
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[.12] Reports on Financial Condition—Amendment—Filing
[.13] Shareholders—Dividends—Approval
[.14] Shareholders—Disclosure—Cease and Desist Order
[.15] Compliance—Progress Reports—Frequency
[.16] Policy Revisions—Prior Review and Comment
In the Matter of
CITY THRIFT AND LOAN
ASSOCIATION
LOS ANGELES, CALIFORNIA
(Insured State Nonmember Depository
Institution)
ORDER TO CEASE AND DESIST
City Thrift and Loan Association, Los Angeles, California ("Insured Institution"), 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 Insured Institution 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"), dated November 27, 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 Insured Institution 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 Insured Institution 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 Insured Institution, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of affairs of the Insured Institution, cease and desist from the following unsafe or unsound banking practices and violations:
(a) following hazardous lending and lax collection practices;
(b) operating with inadequate equity capital and reserves in relation to the volume of book quality assets held by the Insured Institution;
(c) operating with a large volume of poor quality loans;
(d) operating with an inadequate loan valuation reserve;
(e) operating with inadequate provisions for liquidity and funds management;
(f) operating with inadequate routine and controls policies; and
(g) operating in violation of Section 18271 of the California Financial Code, as more fully described on page 6-a of the Report of Examination as of April 28, 1989; and Section 18436 of the California Financial Code, as more fully described on page 6-a of the Report of Examination as of April 28, 1989.
IT IS FURTHER ORDERED that the Insured Institution take affirmative action as follows:
[1.] 1. (a) During the life of this ORDER, the Insured Institution shall retain qualified management. At a minimum, such management shall include a chief executive officer who through education and experience has the proven ability to manage a thrift of comparable size and to upgrade a low quality loan portfolio, and a senior lending officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Insured Institution's loans. Both individuals shall be provided the necessary written authority to implement the provisions of this ORDER. The continued acceptability of management shall be assessed on its ability to:
(i) comply with the requirements of this ORDER:
(ii) operate the Insured Institution in a safe and sound manner;
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(iii) comply with applicable laws and regulations; and
(iv) restore all aspects of the Insured Institution to a safe and sound condition, including asset quality, capital, adequacy, earnings, management effectiveness, and liquidity.
(b) In the event the FDIC determines that management is not acceptable for the purposes of Paragraph 1(a), the Regional Director of the San Francisco Regional Office ("Regional Director") shall provide written notification of such determination to the board of directors of the Insured Institution. Within 90 days from the date of such notification, the board of directors of the Insured Institution shall employ management that is acceptable in accordance with the provisions of Paragraph 1(a).
(c) During the life of this ORDER, the Insured Institution shall notify the Regional Director and the Commissioner of Corporations ("Commissioner") in writing of any changes in management. The notification must include the names and background of any replacement personnel and must be provided prior to the individual assuming the new position.
[2.] 2. (a) Within 90 days from the effective date of this Order, the board of directors of the Insured Institution shall be expanded by the addition of at least one individual who is not related to any current director by blood or marriage.
(b) Any additional director(s) shall have the previously demonstrated skill and experience to contribute independent judgment to group deliberation.
(c) The name and a statement of qualifications of any new board member shall be submitted to the Regional Director and the Commissioner for review and approval within 30 days prior to the service of the individual as a director.
[3.] 3. (a) During the life of this ORDER, the Insured Institution shall maintain adjusted primary capital in such an amount as to equal or exceed seven and one half (7.5) percent of the Insured Institution's adjusted Part 325 total assets. 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 and/or shareholders of the Insured Institution; or
(iv) the collection of assets previously charged off; or
(v) the reduction of the "Loss" and "Doubtful" assets specified in Paragraph 4 of this ORDER without loss or liability to the Insured Institution; or
(vi) any other means acceptable to the Regional Director and the Commissioner; or
(vii) any combination of the above means.
(c) If all or part of the increase in primary capital required by Paragraph 3 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 Insured Institution's securities (including a distribution limited only to the Insured Institution's existing shareholders), the Insured Institution shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Insured Institution 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
{{4-1-90 p.C-155}}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 Insured Institution shall provide to any subscriber and/or purchaser of the Insured Institution'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 Insured Institution 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 Insured Institution's securities who received or was tendered the information contained in the Insured Institution'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)).
[4.] 4. (a) Within 10 days from the effective date of this ORDER, the Insured Institution shall eliminate from its books, by charge-off or collection, all assets classified "Loss" and one-half of the assets classified "Doubtful" as of April 28, 1989, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Insured Institution is not considered collection for the purpose of this paragraph.
(b) Within 180 days from the effective date of this ORDER, the Insured Institution shall have reduced the aggregate of those assets classified "Substandard" and those assets classified "Doubtful" as of April 28, 1989 (that have not previously been charged off) to no more than 180% of adjusted primary capital.
(c) Within 360 days from the effective date of this ORDER, the Insured Institution shall have reduced the aggregate of those assets classified "Substandard" and those assets classified "Doubtful" as of April 28, 1989 (that have not previously been charged off) to no more than 140% of adjusted primary capital.
(d) Within 540 days from the effective date of this ORDER, the Insured Institution shall have reduced the aggregate of those assets classified "Substandard" and those assets classified "Doubtful" as of April 28, 1989 (that have not previously been charged off) to no more than 100% of adjusted primary capital.
(e) Within 720 days from the effective date of this ORDER, the Insured Institution shall have reduced the aggregate of those assets classified "Substandard" and those assets classified "Doubtful" as of April 28, 1989 (that have not previously been charged off) to no more than 60% of adjusted primary capital.
(f) The requirements of subparagraphs 4(a), 4(b), 4(c), 4(d), and 4(e) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Insured Institution shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Insured Institution is not considered collection for the purpose of this paragraph. As used in subparagraphs 4(b), 4(c), 4(d), 4(e), and 4(f) the word "reduce" means:
(i) to collect;
(ii) to charge-off; or
(iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.
[5.] 5. (a) Beginning with the effective date of this ORDER, the Insured Institution shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Insured Institution that has been charged off or classified, in whole or in part, "Loss" and is uncollected. Subparagraph 5(a) of this ORDER shall not prohibit the Insured Institution from renewing or extending the maturity of any credit in accordance with the Financial Accounting Standards Board Statement Number 15 ("FASB 15").
(b) Beginning with the effective date of this ORDER, the Insured Institution shall
{{4-1-90 p.C-156}}not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Insured Institution that has been classified, in whole or part, "Substandard" or "Doubtful" without the prior approval of a majority of the board of directors of the Insured Institution. Prior to the extending of any additional credit pursuant to this paragraph, either in the form of a renewal, extension, or further advance of funds, such additional credit shall be approved by a majority of the board of directors who shall certify in writing:
(i) why the failure of the Insured Institution to extend such credit would be detrimental to the best interests of the Insured Institution;
(ii) that the Insured Institution's position would be improved thereby; and
(iii) how the Insured Institution's position would be improved.
The signed certification shall be made a part of the minutes of the board of directors, and a copy of the signed certification shall be retained in the borrower's credit file. Subparagraph 5(b) of this ORDER shall not prohibit the Insured Institution from renewing or extending the maturity of any credit in accordance with FASB 15, providing that such renewal or extension shall be made only with the prior approval of a majority of the board of directors or the loan committee of the Insured Institution.
(c) In connection with subparagraph 5(a) and 5(b) of this ORDER, the Insured Institution shall not:
[6] (i) continue the accrual of interest on any loan which is delinquent in principal or interest payments ninety (90) days or more unless the asset is both well secured and in the process of collection; or
(ii) engage in any practice or device which essentially avoids recognition of overdue loans and/or artificially inflates the income of the Insured Institution. For any loans restructured in accordance with FASB 15, consideration should be given to the reasonableness of the modified terms of the loan, since loans should not be restructured in an attempt to conceal credit losses or delay their recognition.
(d) For the purpose of subparagraph 5(c) of this ORDER, debt is "well secured" if it is secured by:
(i) by collateral in the form of liens on or pledges of real or realizable value sufficient to discharge the debt (including accrued interest) in full; or
(ii) by the guaranty of a financially responsible party.
A debt is "in the process of collection" if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status.
[.7] 6. (a) Within sixty (60) days from the effective date of this ORDER, the Insured Institution shall revise, adopt and implement written lending and collection policies to provide effective guidance and control over the Insured Institution's lending function. 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 Insured Institution'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 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;
(iii) 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;
(iv) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $50,000 which are classified "Substandard" and "Doubtful" as of
{{9-30-93 p.C-157}}April 28, 1989 or by the FDIC or Department of Corporations in subsequent Reports of Examination and all other 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
(v) 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.
[.8] 7. No later than December 31, 1989, the Insured Institution shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve shall be established by charges to current operating income, together with collection of assets previously charged off. In complying with the provisions of this paragraph, the board of directors shall review the adequacy of the Insured Institution's reserve for loan losses prior to the end of each quarter. The minutes of the board of directors meeting at which such review is undertaken shall indicate the results of the review, the amount of any increase in the reserve, and the basis for determination of the amount of the reserve provided.
[.9] 8. (a) Within 90 days of the effective date of this ORDER, the Insured Institution shall develop a business plan covering the period January 1, 1990 through the end of 1992. The plan shall include projections as to growth, capital, deposit sources, general investment plans and earnings, specifically with respect to overhead expenses.
(b) The business plan and its implementation shall be in a form and manner that is acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
[.10] 10. Within 60 days from the effective date of this ORDER, the insured Institution shall eliminate and/or correct all violations of law which are more fully set out on page 6-a of the Report of Examination of the Insured Institution as of April 28, 1989.
In addition, the Insured Institution shall take all necessary steps to ensure future compliance with all applicable laws and regulations.
[.11] 10. Within 60 days from the effective date of this ORDER, the Insured Institution shall revise, adopt, and implement its written liquidity and funds management policy. Revisions shall include specific guidelines against which performance in the area can be measured, including, but not limited to, the measurement of volatile liability dependence and the ratio of temporary investments to volatile liabilities. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
[.12] 11. Within 10 days after eliminating from its books any asset in compliance with Paragraph 4 of this ORDER, the Insured Institution shall file with the FDIC amended Consolidated Reports of Condition and Income which shall accurately reflect the financial condition of the Insured Institution for all reporting periods subsequent to June 30, 1988. Thereafter, during the life of this ORDER, the Insured Institution shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Insured Institution as of the end of the period for which the Reports are filed, including any adjustment in the Insured Institution's books made necessary or appropriate as a consequence of any State of California or FDIC examination of the Insured Institution during that reporting period.
[.13] 12. The Insured Institution 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 adjusted primary capital to total assets of the Insured Institution will be not less than seven and one-half (7.5) percent;
(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
{{9-30-93 p.C-158}}the Commissioner, which approval shall not be unreasonably withheld.
[.14] 13. Following the effective date of this ORDER, the Insured Institution shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Insured Institution's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Insured Institution'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] 14. Within 30 days of the end of the first calendar quarter following the effective date of this ORDER, and within thirty (30) days of the end of each quarter thereafter, the Insured Institution 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 Insured Institution's Report of Condition and the Insured Institution'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 Insured Institution in writing from making further reports.
[.16] 15.
Notwithstanding the foregoing, any policies that are required to be drafted and/or revised pursuant to the foregoing provisions shall be submitted to the Regional Director for his review and comments. The Regional Director shall provide written comments to the Insured Institution on any such policies within thirty (30) days of receipt of same by the Regional Director. A copy of such written correspondence shall be provided to the Commissioner.
The provisions of this ORDER shall be binding upon the Insured Institution, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Insured Institution.
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 modified, terminated, suspended, or set aside by the FDIC.
Pursuant to delegated authority.
Dated at San Francisco, California, this 11th day of December, 1989.
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