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FDIC Enforcement Decisions and Orders

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   [10,046] In the Matter of Statewide Thrift and Loan Company, Redwood City, California, Docket No. FDIC-90-13b (2-14-90).

   Bank to cease and desist from practices such as operating with inadequate management; following hazardous lending and lax collection practices; and operating 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 policy. (This order was terminated by order of the FDIC dated 11-20-91; see ¶15,363.)

   [.1] Management—Qualifications—Compliance
   [.2] Management—Changes—Notification
   [.3] Primary Capital—Minimum Required—Calculation
   [.4] Assets—Adversely Classified—Reduce
   [.5] Loans—Extensions of Credit—Curtail
   [.6] Definition—"Well Secured Debt"
   [.7] Loan Policy—Minimum Requirements—Review
   [.8] Loans—Loan Concentrations—Reduce
   [.9] Loan Loss Reserve—Adequacy—Review
   [.10] Asset/Liability Management Policy—Minimum Requirements— Review
   [.11] Bank Operations—Internal Routine and Control Policies—Review
   [.12] Reports on Financial Condition—Amendment—File
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   [.13] Holding Company—Management/Consulting Fees—Limitations
   [.14] Shareholders—Dividends—Approval
   [.15] Brokered Deposits—Reduce/Eliminate—Review
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Compliance—Progress Reports—Frequency
In the Matter of

STATEWIDE THRIFT AND LOAN
COMPANY REDWOOD CITY, CALIFORNIA
(Insured State Nonmember Depository Institution)
ORDER TO CEASE AND DESIST

   Statewide Thrift and Loan Company, Redwood City, California ("Insured Institution"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices 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 January 24, 1990, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, 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. 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:
   (a) operating with inadequate management;
   (b) following hazardous lending and lax collection practices;
   (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; and
   (f) operating with inadequate routine and controls policies.
   IT IS FURTHER ORDERED that the Insured Institution take affirmative action as follows:

   [.1] 1. (a) The Insured Institution shall have and retain qualified management. At a minimum, such management shall include a chief executive officer with proven ability in managing an insured institution of comparable size and experience in upgrading a low quality loan portfolio, and a senior lending officer qualified to restore the Insured Institution to a sound condition. Such persons shall be provided the necessary written authority to implement the provisions of this ORDER. The qualifications of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER;
       (ii) operate the Insured Institution in a safe and sound manner;
       (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.

   [.2] (b) During the life of this ORDER, the Insured Institution shall notify the Regional Director of the San Francisco Regional Office ("Regional Director") and the California Department of Corporations ("Commissioner") in writing of any changes in management. The notification must include the names and background of {{4-1-90 p.C-236}}any replacement personnel and must be provided prior to the individual assuming the new position.

   [.3] 2. (a) During the life of this ORDER, the Insured Institution shall maintain adjusted primary capital in such an amount as to equal or exceed ten percent (10%) 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" schedule in the FDIC Report of Examination.
   (b) 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] 3. (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" as of August 15, 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 90 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of August 15, 1989 that have not previously been charged off to not more than $1,300,000.
   (c) Within 180 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of August 15, 1989 that have not previously been charged off to not more than $1,000,000.
   (d) Within 360 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of August 15, 1989 that have not previously been charged off to not more than $750,000.
   (e) The requirements of subparagraphs 3(a), 3(b), 3(c), and 3(d) 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 3(b), 3(c), 3(d), and 3(e) 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] 4. (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 4(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 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" without the prior approval of a majority of the board of directors or the loan committee of the Insured Institution. Subparagraph 4(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 4(a) and 4(b) of this ORDER, the Insured Institution shall not:
       (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 C-237
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.
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   [.6] (d) For the purpose of subparagraph 4(c) of this ORDER, debt is "well secured" if it is secured by:
       (i) collateral in the form of liens on or pledges of real or personal property that have a realizable value sufficient to discharge the debt (including accrued interest) in full; or
       (ii) 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] 5. (a) Within 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, which policies shall include specific guidelines for placing loans on a non-accrual basis. In addition, the Insured Institution shall obtain adequate and current documentation for all loans in the Insured Institution'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 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 the development and implementation of an installment loan and contract grading system for all loans held in the Insured Institution's portfolio as of August 15, 1989 and all such loans originated thereafter. Such a grading system shall rate loans on a scale of "1" through "5" in ascending order of management concern. Loans and contracts graded "4" and "5" shall be considered subquality and shall be reported to the board of directors for review at least monthly with such review noted in the minutes. The Insured Institution's loan grading system, at a minimum, shall consider the six criteria which are more fully set out on page 2-a-1 of the Report of Examination of the Insured Institution as of August 15, 1989 and used by the examination team to rate installment loan contract quality;
       (iii) provisions which establish limits on debt to income ratios, which ratios shall include provisions for fixed expenses associated with automobile ownership, including, but not limited to comprehensive collision and personal liability insurance premiums;
       (iv) provisions which establish minimum requirements for downpayments;
       (v) provisions which adequately restrict and/or define maximum terms for loan contracts in conjunction with the term to maturity upon rewriting the loan;
       (vi) provisions which adequately establish minimum collateral margins and/or maximum loan to value ratios;
       (vii) provisions which require adequate borrower credit information, including, at a minimum, new credit applications and/or updated credit reports at time of rewrite;
       (viii) provisions which establish limits on unsecured lending; and
       (ix) provisions which prohibit concentrations of credit in excess of 25 percent of the Insured Institution's total equity capital and reserves to any borrower and that borrower's related interests.

   [.8] 6. Within 90 days from the effective date of this ORDER, the Insured Institution shall establish a policy to reduce loan concentrations and to establish guidelines concerning diversification of the Insured Institution's loan portfolio. Such policy {{4-1-90 p.C-238}}shall be acceptable to the Regional Director and the Commissioner.

   [.9] 7. Within 10 days from the effective date of this ORDER, 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.

   [.10] 8. (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 Insured Institution'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 25 percent; and within 360 days from the effective date of this ORDER, be reduced to not more than 10 percent. The requirements of this paragraph shall not be construed as standards for future operations, and the Insured Institution'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 Insured Institution Performance Report";
       (iii) establishing maturity ranges for the Insured Institution's investment portfolio;
       (iv) establishing acceptable ranges for the Insured Institution's rate sensitivity and gap ratios; 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.

   [.11] 9. Within 60 days from the effective date of this ORDER, the Insured Institution shall adopt and implement a policy for the operation of the Insured Institution in such a manner as to provide adequate internal routine and control policies 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.

   [.12] 10. 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] 11. Within 60 days from the effective date of this ORDER, the Insured Institution shall develop, adopt, and implement a written policy satisfactory to the Regional Director and the Commissioner, which policy shall govern the relationship between the Insured Institution and its holding company, 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 Insured Institution's holding company to only those fees or funds paid in connection with services performed by the Insured Institution's holding company on behalf of or for the benefit of the Insured Institution.

   [.14] 12. The Insured Institution shall not pay cash dividends without the prior written consent of the Regional Director and the Commissioner.

   [.15] 13. Upon the effective date of this ORDER, the Insured Institution shall not increase the amount of brokered deposits above the amount outstanding on that date. Within ten (10) days of the effective date of this ORDER, the Insured Institution shall submit to the Regional Director and the Commissioner a written plan for eliminating its reliance on brokered deposits. The plan should contain details as to the current composition of brokered deposits by matu- {{5-31-93 p.C-239}}rity and explain the means by which such deposits will be paid or rolled over. The Regional Director and the Commissioner shall have the right to reject the Insured Institution's plan. On the tenth day of each month, the Insured Institution shall provide a written progress report to the Regional Director and the Commissioner detailing the level, source, and use of brokered deposits with specific reference to progress under the Insured Institution's plan. For purposes of this ORDER, brokered deposits are defined to include any deposits funded by third party agents or nominees for depositors, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or asserts a right to federal deposit insurance.

   [.16] 14. 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.

   [.17] 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 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.
   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.
   Dated at San Francisco, California, this 14th day of February, 1990.
   Pursuant to delegated authority.

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