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FDIC Enforcement Decisions and Orders

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{{10-31-94 p.C-2424}}
   [10,570] In the Matter of Investors Finance, Inc., Honolulu, Hawaii, Docket No. FDIC-92-188b (6-18-92).

   Thrift to cease and desist from such unsafe or unsound practices as operating with inadequate management; operating with inadequate capital; operating with an excessive level of poor quality assets; operating without adequate reserve for loan losses; and following hazardous lending and lax collection practices; operating with inadequate liquidity and funds management; operating without proper internal routine and controls; operating in such a manner as to produce operating losses; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 8-9-94; see ¶ 15,901.)

   [.1] Management—Qualifications—Review
   [.2] Board of Directors—Meetings—Frequency
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Loans—Special Mention—Correct Deficiencies
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Lending and Collection Policy—Minimum Requirements
   [.8] Loan Loss Reserve—Establish/Maintain
   [.9] Budget and Earnings Plan—Preparation Required
   [.10] Violations of Law—Eliminate/Correct
   [.11] Asset/Liability Management—Written Policy—Minimum Requirements
   [.12] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.13] Shareholders—Disclosure—Cease and Desist Order
   [.14] Compliance Reports—Frequency

{{8-31-92 p.C-2425}}
In the Matter of
INVESTORS FINANCE, INC. HONOLULU, HAWAII
(Insured State Nonmember Thrift)
ORDER TO CEASE AND DESIST
FDIC-92-188b

   Investors Finance, Inc., Honolulu, Hawaii ("Thrift"), 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 Thrift 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 June 15, 1992, 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 Thrift 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 Thrift 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 Thrift, 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 and violations:
   (a) operating with inadequate management;
   (b) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Thrift;
   (c) operating with a large volume of poor quality loans;
   (d) operating with an inadequate loan valuation reserve;
   (e) following hazardous lending and lax collection practices;
   (f) operating with inadequate provisions for liquidity and funds management;
   (g) operating with inadequate routine and controls policies;
   (h) operating in such a manner as to produce operating losses; and
   (i) operating in violation of section 323.5(b) of the FDIC's Rules and Regulations, 12 C.F.R. § 323.5(b), as more fully described on page 6-a of the Report of Examination as of February 24, 1992; section 350.3 of the FDIC's Rules and Regulations, 12 C.F.R. § 350.3, as more fully described on page 6-a of the Report of Examination as of February 24, 1992; section 350.4 of the FDIC's Rules and Regulations, 12 C.F.R. § 350.4, as more fully described on page 6-a of the Report of Examination as of February 24, 1992; section 350.7(b) of the FDIC's Rules and Regulations, 12 C.F.R. § 350.7(b), as more fully described on page 6-a of the Report of Examination as of February 24, 1992; section 408-14(d) of the Hawaii Revised Statutes, as more fully described on page 6-a of the Report of Examination as of February 24, 1992; and section 408-14.7(a)(2) of the Hawaii Revised Statutes, as more fully described on page 6-a of the Report of Examination as of February 24, 1992.
   IT IS FURTHER ORDERED that the Thrift take affirmative action as follows:

   [.1] 1. The Thrift 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. Management should include a chief executive officer with proven ability in managing a Thrift 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 in upgrading a low quality loan portfolio. Each member of management shall be provided appropriate written authority from the Thrift's board of directors to implement the provisions of this ORDER.
{{8-31-92 p.C-2426}}
   (b) The qualifications of management shall be assessed on its ability to:
       (i) comply with the requirements of this ORDER;
       (ii) operate the Thrift in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
       (iv) restore all aspects of the Thrift 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 shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the State of Hawaii ("Commissioner") in writing when it proposes to add any individual to the Thrift'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 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.

   [.2] 2. Within 30 days from the effective date of this ORDER, the board of directors shall increase its participation in the affairs of the Thrift, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Thrift's activities, consistent with the role and expertise commonly expected for directors of thrifts of comparable size. This participation shall include:
   (a) Meetings of the Thrift's board of directors to be held no less frequently than monthly, at which, at a minimum, the following areas are reviews and approved: reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity; operating policies; and individual committee actions. Board minutes shall document these reviews and approvals, including the names of any dissenting directors.
   (b) Formulation of a loan committee comprised of at least two members of the Thrift's board of directors, including Director Kazuo Omiya during his tenure as a director of the Thrift. Loan committee minutes shall document the activities of the loan committee.

   [.3] 3. (a) During the life of this ORDER, the Thrift shall maintain Tier 1 capital in such an amount as to equal or exceed ten (10.0) percent of the Thrift's total assets, unless prior written consent to maintain a lesser amount is received from the Regional Director and a Commissioner.
   (b) Within 90 days from the effective date of this ORDER, the Thrift shall develop and adopt a plan to prevent any further decline of the Thrift's Tier 1 capital ratio and the Thrift's risk-based capital ratio. The plan shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations.
   (c) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraph 3(a) shall be in addition to a fully funded loan loss reserve, the adequacy of which shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.
   (d) Any increase in Tier 1 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 noncumulative perpetual preferred stock; or
       (iii) the direct contribution of cash by the board of directors and/or shareholders of the Thrift; or
       (iv) any other means acceptable to the Regional Director and the Commissioner; or
       (v) any combination of the above means.
Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3 of this ORDER may not be accomplished through a deduction from the Thrift's loan loss reserves.
   (e) If all or part of the increase in Tier 1 capital required by Paragraph 3 of this ORDER is accomplished by the sale of new securities, the board of directors shall {{8-31-92 p.C-2427}}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's securities (including a distribution limited only to the Thrift's existing shareholders), the Thrift shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Thrift 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 Section, 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 Tier 1 capital is provided by the sale of noncumulative perpetual 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.
   (f) In complying with the provisions of Paragraph 3 of this ORDER, the Thrift shall provide to any subscriber and/or purchaser of the Thrift'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 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's securities who received or was tendered the information contained in the Thrift's original offering materials.
   (g) For the purposes of this ORDER, the terms "Tier 1 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] 4. (a) Within 10 days from the effective date of this ORDER, the Thrift shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of February 24, 1992, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Thrift is not considered collection for the purpose of this paragraph.
   (b) Within 180 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" as of February 24, 1992 that have not previously been charged off to not more than $1,107,000.
   (c) Within 360 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" as of February 24, 1992 that have not previously been charged off to not more than $904,000.
   (d) The requirements of subparagraphs 4(a), 4(b), and 4(c) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Thrift shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Thrift is not considered collection for the purpose of this paragraph. As used in subparagraphs 4(b), 4(c), and 4(d) 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. Within 90 days from the effective date of this ORDER, the Thrift shall substantially and to the extent reasonably feasible correct all documentation deficiencies contained in the loans listed for "Special Mention" as of February 24, 1992.

   [.6] 6. (a) Beginning with the effective date of this ORDER, the Thrift shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any {{8-31-92 p.C-2428}}borrower who has a loan or other extension of credit from the Thrift that has been charged off or classified, in whole or in part, "Loss" and is uncollected. Subparagraph 6(a) of this ORDER shall not prohibit the Thrift 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 Thrift 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 Thrift 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 Thrift. Subparagraph 6(b) of this ORDER shall not prohibit the Thrift 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 Thrift.
   (c) In connection with subparagraph 6(a) and 6(b) of this ORDER, the Thrift 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) engaged in any practice or device which essentially avoids recognition of overdue loans and/or artificially inflates the income of the Thrift. 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 6(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 and 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] 7. (a) Within 60 days from the effective date of this ORDER, the Thrift shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Thrift's lending function, which policies shall include specific guidelines for placing loans on a non-accrual basis. In addition, the Thrift shall, to the extent reasonably feasible, obtain adequate and current documentation for all loans in the Thrift'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 revision to the Thrift'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 loan 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 Thrift;
       (iii) provisions which require complete loan documentation, realistic repayment terms and current credit information adequate to support the outstanding indebtedness of the borrower for all loans, renewals, and extensions of credit made by the Thrift after the effective date of this ORDER. Such documentation shall include current financial information, profit and loss statements or copies of tax returns and cash flow projections;
       (iv) provisions which incorporate lim- {{8-31-92 p.C-2429}}itations on the amount that can be loaned in relation to established collateral values;
       (v) provisions which specify the circumstances and conditions under which real estate 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 Thrift'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 in accordance with section 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(b);
       (ix) provisions which prohibit the issuance of standby letters of credit unless the letters of credit are fully secured by readily marketable collateral and/or are supported by current and complete financial information;
       (x) 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;
       (xi) provisions which prohibit concentrations of credit in excess of 25 percent of the Thrift's total equity capital and reserves to any borrower and that borrower's related interests;
       (xii) provisions which require the preparation of a loan "watch list" which shall include relevant information on all real estate loans in excess of $50,000 and all consumer loans in excess of $20,000 which are classified "Substandard" and "Doubtful" as of February 24, 1992 or by the FDIC or Hawaii State Banking Department in subsequent Reports of Examination and all other loans in excess of $20,000 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 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] 8. (a) By June 30, 1992, the Thrift shall establish and thereafter maintain an adequate reserve for loan losses.
   (b) Additionally, within 60 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 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 non-accrual 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 shall increase and maintain its loss reserve consistent with the loan loss reserve policy established. Such policy and its implementation shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

[.9] 9. (a) Within 90 days from the effective date of this ORDER, the Thrift shall formulate and fully implement a written plan and a comprehensive budget for all
{{8-31-92 p.C-2430}}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's net interest margin, increase interest income, reduce discretionary expenses, and improve and sustain earnings of the Thrift. 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 shall formulate such a plan and budget by November 30 of each subsequent year.
   (b) The plan and budget required by subparagraph 8(a) of this ORDER, upon completion, shall be submitted to the Regional Director and Commissioner for their review and opportunity for comment.
   (c) Following the end of each calendar quarter, the board of directors shall evaluate the Thrift's actual performance in relation to the plan and budget required by subparagraph 8(a) of this ORDER and shall record the results of the evaluation, and any actions taken by the Thrift, in the minutes of the board of directors meeting at which such evaluation is undertaken.

   [.10] 10. Within 90 days from the effective date of this ORDER, the Thrift 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 Thrift as of February 24, 1992. In addition, the Thrift 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 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 Thrift's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination;
       (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 Thrift Performance Report";
       (iii) establishing maturity ranges for the Thrift's investment portfolio.
       (iv) establishing acceptable ranges for the Thrift'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.

   [.12] 12. Within 60 days from the effective date of this ORDER, the Thrift shall adopt and implement a policy for the operation of the thrift in such a manner as to provide adequate internal routine and control policies consistent with safe and sound banking practices, including the correction of all deficiencies noted in the Report of Examination as of February 24, 1992. Such policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

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

   [.14] 14. 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 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's Report of Condition and the Thrift'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
{{6-30-95 p.C-2431}}released the Thrift in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Thrift, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Thrift.
   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 18th day of June, 1992.
   Pursuant to delegated authority.

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