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FDIC Enforcement Decisions and Orders

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   [10,054] In the Matter of Federal Finance and Mortgage, Ltd., Honolulu, Hawaii, Docket No. FDIC-89-179b (3-14-90).

   Bank to cease and desist from unsafe and unsound banking practices; operating with inadequate equity capital and reserves, a large volume of poor quality credits, and an inadequate loan valuation reserve; and following hazardous lending and collection policies. (This order was terminated by order of the FDIC dated 6-10-93; see15,685.)

   [.1] Management—Qualifications—Compliance
   [.2] Primary Capital—Increase—Methods
   [.3] Assets—Adversely Classified—Reduce
   [.4] Loans—Extension of Credit—Curtail
   [.5] Loan Policy—Minimum Requirements—Review
   [.6] Loan—Concentrations—Reduce
   [.7] Loan Loss Reserve—Adequacy—Review
   [.8] Asset/Liability Management Policy—Internal Controls—Implement
   [.9] Reports on Financial Condition—Amendment—Filing
   [.10] Shareholders—Dividends—Approval
   [.11] Brokered Deposits—Reduce—Definition
   [.12] Shareholders—Disclosure—Cease and Desist Order
   [.13] Compliance—Progress Reports—Frequency

In the Matter of

FEDERAL FINANCE AND
MORTGAGE, LTD.

HONOLULU, HAWAII
(Insured State Nonmember Depository
Institution)
ORDER TO CEASE AND DESIST
   The Federal Deposit Insurance Corporation ("FDIC"), on September 6, 1989, is issued to Federal Finance and Mortgage, Ltd., Honolulu, Hawaii ("Federal Finance"), a NOTICE OF CHARGES AND OF HEARING ("NOTICE"), pursuant to section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. Section 1818(b)(1). The NOTICE charges Federal Finance with having engaged in unsafe or unsound banking practices.
   Federal Finance and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated February 13, 1990, whereby, solely for the purpose of this proceeding and without admitting or denying the allegations in the NOTICE, Federal Finance 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 Federal Finance 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 Federal Finance, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of affairs of Federal Finance, cease and desist from the following unsafe or unsound banking practices and violations:
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   (a) operating with inadequate equity capital and reserves;
   (b) operating with a large volume of poor quality credits;
   (c) operating with an inadequate loan valuation reserve; and
   (d) following hazardous lending and collection policies.
   IT IS FURTHER ORDERED that Federal Finance take affirmative action as follows:

   [.1] 1. Within ninety (90) days of this ORDER, Federal Finance shall provide and thereafter retain management, including a chief executive officer, acceptable to the Regional Director of the San Francisco Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the State of Hawaii ("Commissioner"). The continued acceptability of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER;
       (ii) operate Federal Finance in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
       (iv) restore all aspects of Federal Finance to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.

   [.2] 2. (a) Within ninety (90) days from the effective date of this ORDER, Federal Finance shall increase primary capital by no less than $200,000, and shall have adjusted primary capital in such an amount as to equal or exceed seven and one-half (7.5) percent of Federal Finance's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, Federal Finance shall maintain adjusted primary capital in such an amount as to equal or exceed seven and one-half (7.5) percent of Federal Finance's adjusted Part 325 total assets. Primary capital and Part 325 total assets 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 2 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 Federal Finance; or
       (iv) the collection of assets previously charged off; or
       (v) the reduction of the "Loss" assets specified in Paragraph 3 of this ORDER without loss or liability to Federal Finance; 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 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 Federal Finance's securities (including a distribution limited only to Federal Finance's existing shareholders), Federal Finance shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of Federal Finance 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, and the Commissioner, for review. Any changes requested to be made in the plan or materials by the FDIC or the Commissioner 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, includ- {{4-1-90 p.C-276}}ing, but not limited to, those terms and conditions relative to interest rate and convertibility factors, shall be presented to the Regional Director and the Commissioner for prior approval.
   (d) In complying with the provisions of Paragraph 2 of this ORDER, Federal Finance shall provide to any subscriber and/or purchaser of Federal Finance's securities, a 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 Federal Finance's 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 Federal Finance's securities who received or was tendered the information contained in Federal Finance'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. Sections 325.2(h) and 325.2(k)).

   [.3] 3. (a) Within ten (10) days from the effective date of this ORDER, Federal Finance shall eliminate from its books, by charge-off, collection or reduction, all assets classified "Loss" as of May 31, 1989 that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by Federal Finance is not considered collection for the purpose of this paragraph.
   (b) Within ninety (90) days from the effective date of this ORDER, Federal Finance shall have reduced the assets classified "Substandard" as of May 31, 1989 that have not been charged off by at least twenty-five (25) percent.
   (c) Within one hundred eighty (180) days from the effective date of this ORDER, Federal Finance shall have reduced the assets classified "Substandard" as of May 31, 1989 that have not previously been charged off by at least fifty (50) percent.
   (d) Within two hundred seventy (270) days from the effective date of this ORDER, Federal Finance shall have reduced the assets classified "Substandard" as of May 31, 1989 that have not previously been charged off by at least sixty-five (65) percent.
   (e) Within three hundred sixty (360) days from the effective date of this ORDER, Federal Finance shall have reduced the assets classified "Substandard" as of May 31, 1989 that have not previously been charged off by at least eighty (80) percent.
   (f) The requirements of subparagraph 3 of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, Federal Finance shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by Federal Finance is not considered collection for the purpose of this paragraph. As used in Paragraph 3, the word "reduce" or "reduction" 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.

   [.4] 4. (a) Beginning with the effective date of this ORDER, Federal Finance 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 Federal Finance that has been charged off or classified, in whole or in part, "Loss" and is uncollected. The requirements of this paragraph shall not prohibit the Depository Institution from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.
   (b) Beginning with the effective date of this ORDER, Federal Finance 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 Federal Finance 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 Federal Finance. Such approval shall be by written certification stating:
       (i) why the failure of the Depository Institution to extend such credit would be detrimental to the best interest of the Depository Institution;
       (ii) that the Depository Institution's position would be improved thereby; and
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       (iii) how the Depository Institution's position would be improved.
   The signed certification shall be made a part of the minutes of the board of directors or designated committee, and a copy of the signed certification shall be retained in the borrower's credit file.

   [.5] 5. (a) Within sixty (60) days from the effective date of this ORDER, the Depository Institution shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Depository Institution's lending function, which policies shall include specific guidelines for placing loans on a non-accrual basis. In addition, the Depository Institution shall obtain adequate and current documentation for all loans in the Depository Institution's loan portfolio. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner.
   (b) 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.

   [.6] 6. Within one hundred eighty (180) days from the effective date of this ORDER (unless an alternative timetable or proposal is submitted by Federal Finance and approved by the Regional Director and the Commissioner within sixty (60) days), Federal Finance shall reduce each loan concentration as specified on Page 2-b of the Report of Examination as of May 31, 1989, to an amount which shall be less than twenty-five (25) percent of Federal Finance's total equity capital and reserves for each individual concentration. In addition, Federal Finance shall not make new extensions of credit to any borrower or associated entities which will equal twenty-five (25) percent or more of Federal Finance's total equity capital and reserves.

   [.7] 7. Within thirty (30) days following the effective date of this ORDER, the board of directors shall establish and thereafter maintain an adequate reserve for loan losses. The adequacy of the reserve shall be reviewed at least ten (10) days prior to the end of each calendar quarter and the results of such review shall be included in the minutes of the board of directors.

   [.8] 8. During the life of this ORDER, the board of directors shall implement a comprehensive asset/liability management policy which shall establish standards consistent with generally accepted prudent banking operations.
   9. During the life of this ORDER, Federal Finance shall implement a policy satisfactory to the Regional Director and the Commissioner for the operation of Federal Finance in such a manner as to provide internal routine and controls consistent with safe and sound banking practices.

   [.9] 10. Within ten (10) days after eliminating from its books any asset in compliance with Paragraph 3 of this ORDER, the Depository Institution shall file with the FDIC amended Consolidated Reports of Condition and Income which shall accurately reflect the financial condition of the Depository Institution as of June 30, 1989. Thereafter, during the life of this ORDER, the Depository Institution shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Depository Institution as of the end of the period for which the Reports are filed, including any adjustment in the Depository Institution's books made necessary or appropriate as a consequence of any State of Hawaii or FDIC examination of the Depository Institution during that reporting period.

   [.10] 11. Federal Finance shall not pay cash dividends except as follows:
   (a) such declarations, payments, and obligations to pay 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 Federal Finance 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 the Regional Director and the Commissioner shall receive at least thirty (30) days prior written notification of the intent to make such declaration and payment of dividends.

   [.11] 12. Upon the effective date of this ORDER, Federal Finance shall not increase {{4-1-90 p.C-278}}the amount of brokered deposits above the amount outstanding on January 23, 1990. Within ten (10) days of the effective date of this ORDER, Federal Finance 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 maturity 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 Federal Finance's plan. On the tenth (10th) and twenty-fifth (25th) days of each month, Federal Finance 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 Federal Finance'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.

   [.12] 13. Following the effective date of this ORDER, Federal Finance shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with Federal Finance's next shareholder communication and also in conjunction with its notice or proxy statement preceding Federal Finance'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, and the Commissioner, 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.

   [.13] 14. Within thirty (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 calendar quarter thereafter, Federal Finance 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 Federal Finance's Report of Condition and Federal Finance'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 Federal Finance in writing from making further reports.
   The provisions of this ORDER shall be binding upon Federal Finance, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of Federal Finance.
   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 14th day of March, 1990.

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