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FDIC Enforcement Decisions and Orders

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   [10,308] In the Matter of Huntington Pacific Thrift and Loan, Cerritos, California, Docket No. FDIC-90-123b (8-16-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate management; operating with hazardous lending and lax collection practices; operating with inadequate liquidity; and operating in such a manner as to produce operating losses. (This order was terminated by order of the FDIC dated 2-12-93; see ¶ 15,602.)

   [.1] Management—Qualifications—Review
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Capital—Core Capital—Increase—Methods
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Loan Loss Reserve—Establish/Maintain
   [.6] Mortgage Servicing Rights—Analysis Required
   [.7] Strategic Plan—Preparation Required
   [.8] Loan Policy—Written Revision—Minimum Requirements
   [.9] Loans—Concentrations of Credit—Reduction Plan
   [.10] Asset/Liability Management—Written Policy—Minimum Requirements
   [.11] Brokered Deposits—Acceptance Limited
   [.12] Profit Plan—Minimum Requirements
   [.13] Reports of Condition and Income—Amendment Required
   [.14] Dividends—Restricted
   [.15] Shareholders—Disclosure—Cease and Desist Order
   [.16] Compliance Reports—Frequency

In the Matter of

HUNTINGTON PACIFIC THRIFT &
LOAN

CERRITOS, CALIFORNIA
(Insured State Nonmember Thrift and
Loan)
ORDER TO CEASE AND DESIST

   The Federal Deposit Insurance Corporation ("FDIC"), on December 7, 1990, issued to Huntington Pacific Thrift and Loan, Cerritos, California ("Thrift and Loan"), 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. § 1818(b)(1). On June 4, 1991, the FDIC issued to the Thrift an AMENDED NOTICE OF CHARGES AND OF HEARING ("AMENDED NOTICE"). The NOTICE charges the Thrift and Loan with having engaged in unsafe or unsound banking practices.
   The Thrift and Loan and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated August 16, 1991, whereby, solely for the purpose of this proceeding and without admitting or denying the allegations in the NOTICE, and Thrift and Loan consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it has reason to believe that the Thrift and Loan 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 Thrift and Loan, and any institution-affiliated party as such 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:
   (a) operating with inadequate management;
   (b) operating with a hazardous level of
{{4-30-93 p.C-1336}}concentrations of credit in relation to the Thrift and Loan's capital account;
   (c) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Thrift and Loan;
   (d) operating with a large volume of poor quality loans;
   (e) following hazardous lending and lax collection practices;
   (f) operating with inadequate provisions for liquidity and funds management; and
   (g) operating in such a manner as to produce operating losses; and
   IT IS FURTHER ORDERED that the Thrift and Loan take affirmative action as follows:

   [.1] 1. The Thrift and Loan 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 Thrift and Loan. Management should include a chief executive officer with proven ability in managing a Thrift and Loan of comparable size, and experience in upgrading a low quality loan portfolio, improving earnings, and other matters needing particular attention. Management should also include a senior lending officer with significant 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 Thrift and Loan's board of directors to implement the provisions of this ORDER.

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

       (i) comply with the requirements of this ORDER;
       (ii) operate the Thrift and Loan in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
       (iv) restore all aspects of the Thrift and Loan to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.
   (c) During the life of this ORDER, the Thrift and Loan shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the California Department of Corporations ("Commissioner") in writing when it proposes to add any individual to the Thrift and Loan'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 or individuals to be added or employed.
   (d) The Thrift and Loan may not add any individual to its board of directors or 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.

[.3] 2. (a) Within 180 days from the effective date of this ORDER, the Thrift and Loan shall increase core capital by no less than $1,300,000, and have core capital in such an amount as to equal or exceed seven (7.0) percent of the Thrift and Loan's total assets. Thereafter, during the life of this ORDER, the Thrift and Loan shall maintain core capital in such an amount as to equal or exceed seven (7.0) percent of the Thrift and Loan's total assets.
   (b) Within 60 days from the effective date of this ORDER, the Thrift and Loan shall develop and adopt a plan to meet the minimum risk-based capital requirements as described in the FDIC Statement of Policy on Risk-Based Capital contained in appendix A to Part 325 of the FDIC Rules and Regulations. 12 C.F.R. Part 325, Appendix A. The plan shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations of visitations.
   (c) Any increase in core 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 non-cumulative perpetual preferred stock; or
       (iii) the direct contribution of cash by the board of directors, shareholders, and/or parent holding company; or
       (iv) any other means acceptable to the Regional Director and the Commissioner.
   (d) If all or part of the increase in core
{{10-31-91 p.C-1337}}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 and Loan's securities (including a distribution limited only to the Thrift and Loan's existing shareholders), the Thrift and Loan shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Thrift and Loan 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. 24029, 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 core 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.
   (e) In complying with the provisions of Paragraph 2 of this ORDER, the Thrift and Loan shall provide to any subscriber and/or purchaser of the Thrift and Loan'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 Thrift and Loan 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 and Loan's securities who received or was tendered the information contained in the Thrift and Loan's original offering materials.
   (f) For the purposes of this ORDER, the terms "core capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. §§ 325.2(m) and 325.2(n) as amended at 56 Fed. Reg. 10154, effective April 10, 1991.

[.4] 3. (a) Within 10 days from the effective date of this ORDER, the Thrift and Loan shall eliminate from its books, by charge-off or collection, all assets classified "Loss" and one-half of the assets classified "Doubtful" as of March 19, 1991, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Thrift and Loan is not considered collection for the purpose of this paragraph.
   (b) Within 365 days from the effective date of this ORDER, the Thrift and Loan shall have reduced the assets (excluding those certain classified assets categorized as excess mortgage service fee receivables) classified "Substandard" as of March 19, 1991 that have not previously been charged off to not more than fifty percent (50%) of core capital as exists on the 365th day.
   (c) The requirements of subparagraphs 3(a) and 3(b) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Thrift and Loan shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Thrift and Loan is not considered collection for the purpose of this paragraph. As used in subparagraphs 3(b) and 3(c) 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; and
       (iv) any other means acceptable to the Regional Director and the Commissioner.

[.5] 4. (a) Within 10 days from the effective date of this ORDER, the Thrift and Loan shall establish and thereafter maintain an adequate reserve for loan losses.
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   (b) Additionally, within 30 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 end of each quarter, 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 Thrift's internal loan review, loan loss experience, trends of delinquent and nonaccrual loans, an estimate of potential loss exposure of significant credits, concentrations of credit, 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 Thrift and Loan shall increase and maintain its loan loss reserve consistent with the reserve for loan loss policy. Such policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

[.6] 5. (a) Within 20 days from the effective date of this Order, the Thrift and Loan shall retain the services of an independent third party (who shall be approved by the FDIC in advance) for the purpose of generating a report which analyzes the value of the excess mortgage service fee receivable.
   (b) Upon completion of the report by the independent third party, the Thrift and Loan shall immediately submit to the Regional Director and the Commissioner a written copy of the report. The analysis of the value of the excess service fee receivables shall be acceptable to the Regional Director and Commissioner.
   (c) Within 15 days from receipt of the report, the Thrift and Loan shall draft a schedule of amortization with regard to the excess mortgage service fee receivables on the Thrift and Loan's books. The amortization schedule shall be acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
   (d) At least once each calendar quarter the Thrift and Loan shall provide for an undated analysis of the value of the excess mortgage service fee receivable and, if necessary, adjust the amortization schedule of the receivables. The analysis should be completed at least 10 days prior to the end of each quarter and any adjustments to the book value or amortization schedule of the receivables made necessary as a result of the update should be made prior to submitting the Reports of Condition and Income. The updated analysis and amortization schedules shall be acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.7] 6. Within 30 days from the effective date of this Order, the Thrift and Loan shall prepare and submit to the Regional Director and the Commissioner a written business/ strategic plan covering the overall operation of the Thrift and Loan. Such plan shall be acceptable to the Regional Director and Commissioner.

   [.8] 7. Within 60 days from the effective date of this ORDER, the Thrift and Loan shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Thrift and Loan'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.

   [.9] 8. Within 60 days from the effective date of this ORDER, the Thrift and Loan shall submit a written plan, approved by its board of directors and acceptable to the Regional Director and the Commissioner for systematically reducing the concentrations of credit as listed on page 2-b in the Report of Examination.

   [.10] 9. Within 60 days from the effective date of this ORDER, the board of directors shall revise, adopt and implement a comprehensive asset/liability management policy which establishes, among other
{{10-31-91 p.C-1339}}things, a prudent range for the Thrift and Loan's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations or visitations.

[.11] 10. (a) Upon the effective date of this Order and until the Thrift and Loan is no longer determined to be an undercapitalized insured depository institution by the Regional Director and the Commissioner, the Thrift and Loan shall not directly or indirectly accept, renew or roll-over brokered deposits.
   (b) Upon determination by the Regional Director and the Commissioner that the Thrift and Loan is no longer considered an undercapitalized insured depository institution, the Thrift and Loan may directly or indirectly accept, renew or roll-over brokered deposits only after submitting an application to, and receiving the written approval of, the Regional Director and the Commissioner which shall address the following elements:

       (i) the volume, rates and maturities on brokered deposits currently held by the Thrift and Loan, if any;
       (ii) the volume and cost of all brokered deposits to be obtained by the Thrift and Loan and their dates of maturity;
       (iii) an explanation of the anticipated use of the brokered deposits, a discussion of the credit quality of investments/ loans to be funded with the brokered deposits, an analysis of the effect of the use of brokered deposits on the Thrift and Loan's funds position and asset/ liability matching, and a review of alternative funding sources available to the Thrift and Loan;
       (iv) a summary of reasons why the Thrift and Loan believes that the acquisition of brokered deposits would not constitute an unsafe or unsound practice in its particular circumstance. In this regard, the Thrift and Loan should seek to demonstrate that its acceptance, renewal or rollover of brokered deposits would not likely increase in a material way the credit, interest rate, or operating risk of the Thrift and Loan.
   (c) With reference to Paragraph 10, the definitions to be applied to the terms "undercapitalized insured depository institution" and "brokered deposit" are set forth in 12 C.F.R. Sections 337.6(a)(5) and 337.6(a)(1), respectively.

[.12] 11. (a) Within 60 days from the effective date of this ORDER, the Thrift and Loan shall formulate and fully implement a written profit plan and a comprehensive budget for all categories of income and expense. The plan and budget required by this paragraph shall include formal goals and strategies, consistent with sound banking practices, to improve the Thrift and Loan's net interest margin, increase interest income, reduce discretionary expenses, and improve and sustain earnings of the Thrift and Loan. The plan shall include a description of the operating assumptions that form the basis for and adequately support, major projected income and expense components. Thereafter, the Thrift and Loan shall formulate such a plan and budget by November 30 of each subsequent year.
   (b) The plan and budget required by subparagraph 11(a) of this ORDER, shall be in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.
   (c) Following the end of each calendar quarter, the board of directors shall evaluate the Thrift and Loan's actual performance in relation to the plan and budget required by subparagraph 11(a) of this ORDER and shall record the result of the evaluation, and any actions taken by the Thrift and Loan, in the minutes of the board of directors meeting at which such evaluation is undertaken.

   [.13] 12. Within 10 days after eliminating from its books any asset in compliance with Paragraph 3 of this ORDER, the Thrift and Loan shall file with the FDIC amended Consolidated Reports of Condition and Income for the time period from March 30, 1988, through March 31, 1991. Thereafter, during the life of this ORDER, the Thrift and Loan shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Thrift and Loan as of the end of the period for which the Reports are filed, including any adjustment in the Thrift and
{{10-31-91 p.C-1340}}Loan's books made necessary or appropriate as a consequence of any regulatory examination of the Thrift and Loan during that reporting period.

   [.14] 13. The Thrift and Loan 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 core capital to total assets of the Thrift and Loan will be not less than seven (7.0) 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 the Commissioner, which approval shall not be unreasonably withheld.

   [.15] 14. Following the effective date of this ORDER, the Thrift and Loan shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Thrift and Loan's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Thrift and Loan's next shareholder meeting. The description shall fully describe the ORDER in all material respects.

   [.16] 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 and Loan 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 and Loan's Report of Condition and the Thrift and Loan's Report of Income. Such reports may be accomplished and the Regional Director and the Commissioner have released the Thrift and Loan in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Thrift and Loan, its directors, officers, employees, agents, successors, assigns, and any institution-affiliated parties of the Thrift and Loan.
   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 16th day of August, 1991.
   Pursuant to delegated authority.

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