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FDIC Enforcement Decisions and Orders

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   [10,079] In the Matter of Commonwealth Thrift and Loan, Torrance, California, Docket No. FDIC-90-94b (6-5-90).

   Thrift to cease and desist from practices such as following hazardous lending and lax collection practices; operating with inadequate capital and reserves, with excessive poor quality loans, with inadequate provisions for liquidity and funds management; operating in a manner so as to produce operating losses; and operating in violation of state law. (This order was terminated by order of the FDIC dated 5-27-92; see ¶ 15,453.)
   [.1] Management—Qualifications—Compliance
   [.2] Board of Directors—Increase—Approval
   [.3] Primary Capital—Increase—Methods
   [.4] Assets—Adversely Classified—Reduce
   [.5] Loans—Extension of Credit—Curtail
   [.6] Loan Policy—Minimum Requirements—Review
   [.7] Loans—Loan Concentration—Reduce
   [.8] Loan Loss Reserves—Adequacy—Review
   [.9] Bank Operations—Overhead/Expenses—Review
   [.10] Violations of Law—Eliminate/Correct—Compliance
   [.11] Liquidity and Funds Management—Written Policy—Review
   [.12] Assets—Brokered Deposits—Review
   [.13] Shareholders—Disclosure—Cease and Desist Order
   [.14] Compliance—Progress Reports—Frequency

In the Matter of

COMMONWEALTH THRIFT AND LOAN
TORRANCE, CALIFORNIA
(Insured State Nonmember Thrift)
ORDER TO CEASE AND DESIST

   Commonwealth Thrift and Loan, Torrance, 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 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 May 15, 1990, 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, 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. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
   IT IS HEREBY ORDERED that the Insured Institution, and all "institution-affiliated parties", as that term is defined in Section 3(u) of the Act, 12 U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices and violations:
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   (a) following hazardous lending and lax collection practices;
   (b) operating with inadequate equity capital and reserves in relation to the volume and quality of 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 in such a manner as to produce operating losses; and
   (g) operating in violation of sections 18271, 18268, 18266, 18436, 1156 and 1140 of the California Corporations Code and more fully described on pages 6-a, 6-a-1 and 6-a-2 of the FDIC Report of Examination dated November 30, 1989.
   IT IS FURTHER ORDERED that the Insured Institution take affirmative action as follows:
   [.1] 1. The Insured Institution shall have and retain qualified management.

       (a) Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Insured Institution. Management should include a chief executive officer with proven ability in managing an Insured Institution of comparable size, and experience in upgrading low quality assets, improving earnings, and other matters needing particular attention. Management should also include a senior lending officer with appropriate lending collection, and loan supervision experience and experience upgrading a low quality loan portfolio. Each member of management shall be provided appropriate written authority from the Insured Institution's board of directors to implement the provisions of this ORDER.
       (b) 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.
       (c) During the life of this ORDER, the Insured Institution shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Commissioner of Corporations for the State of California ("Commissioner") in writing when it proposes to employ any individual as a senior executive officer. The notification must be received at least thirty (30) days before such employment is intended to become effective and should include a description of the background and experience of the individual or individuals to be employed.
       (d) The Insured Institution may not employ any individual as a senior executive officer if the Regional Director issues a notice of disapproval pursuant to section 32 of the Act, 12 U.S.C. § 1831i.
   [.2] 2. (a) Within 180 days from the effective date of this ORDER, the board of directors of the Insured Institution shall be expanded to five individuals or such number as required by the by-laws of the Insured Institution, whichever is greater.
   (b) The additional directors 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 approval thirty (30) days prior to the service of the individual as a director.
   [.3] 3. During the life of this ORDER, the Insured Institution shall maintain adjusted primary capital in such an amount as to equal or exceed eight (8.0) 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 outline in the "Analysis of Capital" schedule in the FDIC Report of Examination.
    (b) Any increase in primary capital necessary to meet the requirements of Paragraph
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    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 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 November 30, 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 120 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of November 30, 1989 that have not previously been charged off to not more than $1,450,000.
   (c) Within 240 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of November 30, 1989 that have not previously been charged off to not more than $1,150,000.
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   (d) Within 360 days from the effective date of this ORDER, the Insured Institution shall have further reduced the assets classified "Substandard" and those assets classified "Doubtful" as of November 30, 1989 that have not previously been charged off to not more than fifty (50.0) percent of the Insured Institution's adjusted primary capital as of that date.
   (e) The requirements of subparagraphs 4(a), 4(b), 4(c) and 4(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 4(b), 4(c), 4(d), and 4(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] 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" or "Doubtful" and is uncollected. The requirements of this paragraph shall not prohibit the Insured Institution from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.

   (b) Additionally, during the life 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" and is uncollected.
   (c) Paragraph 5(b) shall not apply if the Insured Institution's failure to extend further credit to a particular borrower would be detrimental to the best interests 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, or a designated committee thereof, 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 or designated committee, and a copy of the signed certification shall be retained in the borrower's credit file.
   [.6] 6. (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 prohibit the capitalization of interest or loans 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 Insured Institution;
       (iii) provisions which require complete loan documentation, realistic repayment terms and current credit information adequate to support the outstanding indebt
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    edness of the borrower. Such documentation shall include current financial information, profit and loss statements or copies of tax returns and cash flow projections;
       (iv) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values;
       (v) provisions which specify the circumstances and conditions under which collateral appraisals must be conducted and when such appraisals must be conducted by an independent third party;
       (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 Insured Institution'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 and in all other respects are in accordance with Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215;
       (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 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 affiliates as defined in 23A;
       (xi) provisions which prohibit extensions of credit outside of the Insured Institution's primary service area unless approved by the board of directors and submitted to the Regional Director and Commissioner for approval not less than thirty (30) days prior to the proposed extension of credit.
       (xii) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $10,000 which are classified "Substandard" and "Doubtful" as of November 30, 1989 or by the FDIC or Department of Corporations in subsequent Reports of Examination and all other loans in excess of $10,000 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
       (xiii) the board of directors shall adopt procedures whereby officer compliance with the revised loans 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] 7. Within 60 days from the effective date of this ORDER, unless in the interim the Insured Institution submits an alternative plan acceptable to the Regional Director and the Commissioner, the Insured Institution shall remove all concentration as listed on page 2-b in the Report of Examination as of November 30, 1989 to not more than 25 percent of the Insured Institution's adjusted primary capital.

   [.8] 8. (a) Within 30 days from the effective date of this ORDER, the Insured Institution shall establish and thereafter maintain an adequate reserve for loan losses.
   (b) Additionally, within 90 days from the effective date of this ORDER, the board of directors shall develop or revise, adopt and implement a comprehensive policy for determining the adequacy of the reserve for loan losses. For the purpose of this determination, the adequacy of the reserve shall be determined after the charge-off of all loans or other items classified "Loss". The policy shall provide for a review of the reserve at least once each calendar quarter. Said review should be completed at least ten (10) days prior to the due date for submission of that quarter's call report, in order that the findings of the board of directors with respect to the loan loss reserve may be properly reported in the quarterly Reports of Condition and Income. The review should focus on the results of the Insured Institution's internal loan review, loan loss experience, trends of delinquent and non-accrual loans, an estimate of potential loss exposure of significant credits, concentrations of credit, {{3-31-95 p.C-398}}and present and prospective economic conditions. A deficiency in the reserve shall be remedied in the calendar quarter it is discovered, prior to submitting the Report of Condition, by a charge to current operating earnings. The minutes of the board of directors meeting at which such review is undertaken shall indicate the results of the review. Upon completion of the review, the Insured Institution shall increase and maintain its loan loss reserve consistent with the loan loss reserve policy established. Such policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
   [.9] 9. Within 60 days from the effective date of this ORDER, the Insured Institution shall develop and adopt a plan to control overhead and other expenses and restore the Insured Institution's profitability. The plan shall be in a form and manner 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 to the extent legally possible eliminate and/or correct all violations of law which are more fully set out on pages 6-a, 6-a-1 and 6-a-2 of the Report of Examination of the Insured Institution as of November 30, 1989. In addition, the Insured Institution shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.11] 11. Within 60 days from the effective date of this ORDER, the Insured Institution shall revise, adopt, and implement a written liquidity and funds management policy. 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] 12. While this ORDER is in effect, the Insured Institution shall give written notice to the Regional Director and the Commissioner at such time as the Insured Institution intends to make use of brokered deposits as defined in Section 337.6 of the Act, 12 C.F.R. §337.6. The notification should indicate how the brokered deposits are to be utilized with specific reference to credit quality of investments/loans and the effect on the Insured Institution's funds position and asset/liability matching. The Regional Director and the Commissioner shall have the right to reject the Insured Institution's plans for utilizing brokered deposits.

   [.13] 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.

   [.14] 14. On the tenth day of the second month following the effective date of this ORDER, and on the tenth day of every second month 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 may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner has released the Insured Institution in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Insured Institution, and all institution-affiliated parties.
   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 5th day of June, 1990.

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