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FDIC Enforcement Decisions and Orders

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{{5-31-96 p.C-4026}}
   [11,179] In the Matter of Pacific Thrift and Loan Co., Woodland Hills, Calif., Docket No. 95-44b (5-18-95).

   Bank ordered to cease and desist from such unsafe and unsound practices as operating with inadequate management; operating with inadequate equity capital and reserves; operating with a large volume of poor quality loans; operating with an inadequate allowance for loan and lease losses; operating in such a manner as to produce operating losses; and operating in violation of Section 18320 of the California Financial Code. (This order was terminated by order of the FDIC dated 3-27-96. See ¶16,087.)

   [.1] Management—Qualifications
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Loan Loss Reserve—Establish/Maintain
   [.6] Capital Restoration and Business/Profitability Plans
   [.7] Violation of Law—Eliminate/Correct
   [.8] Reports of Condition and Income—Amendment Required
   [.9] Dividends—Restricted
   [.10] Affiliates—Transactions and Relationships Between—Policy
   [.11] Offices—Opening Additional—Consent of Regional Director and Commissioner Required
   [.12] Shareholders—Disclosure—Cease and Desist Order
   [.13] Cease and Desist Order—Progress Reports

In the Matter of

PACIFIC THRIFT AND LOAN
COMPANY

WOODLAND HILLS, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-95-44b

   Pacific Thrift and Loan Company, Woodland Hills, 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 violation of laws and/or regulations 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 12, 1995, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violation of laws and/or regulations, 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 violation of laws and/or regulations. The FDIC, therefore, accepted the {{7-31-95 p.C-4027}}CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Insured Institution, its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and its successors and assigns cease and desist from the following unsafe and unsound banking practices and violation of laws and/or regulations:
   (a) having been operated with inadequate management;
   (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 allowance for loan and lease losses;
   (e) operating in such a manner as to produce operating losses; and
   (f) operating in violation of section 18320 of the California Financial Code, as more fully described on page 8.10 of the Report of Examination as of September 26, 1994.
   IT IS FURTHER ORDERED, that the Insured Institution, its institution-affiliated parties, and its successors and assigns, take affirmation 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 president/ chief operating officer with proven ability in managing an Insured Institution 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 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, and management effectiveness.
       (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 add any individual to the Insured Institution'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 Insured Institution 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. § 18311.

[.2] 2. (a) On or before September 30, 1995, the Insured Institution shall have Tier 1 capital in such an amount as to equal or exceed eight (8.0) percent of the Insured Institution's total assets. Thereafter, during the life of this ORDER, the Insured Institution shall maintain Tier 1 capital in such an amount as to equal or exceed eight (8.0) percent of the Insured Institution's total assets.
   (b) During the life of this ORDER, the Insured Institution shall maintain at least the minimum risk-based capital levels 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.
   (c) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraph 2(a) shall be in {{7-31-95 p.C-4028}}addition to a fully funded allowance for loan and lease losses, 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 2 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) any other means acceptable to the Regional Director and the Commissioner;
       (iv) earnings; or
       (v) any combination of the above means.
Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 2 of this ORDER may not be accomplished through a deduction from the Insured Institution's allowance for loan and lease losses unless the Bank maintains a fully funded allowance for loan and lease losses pursuant to paragraph (c) above, and then only under the following circumstances: (i) reserves that relate to loans sold; (ii) reserves that relate to loans paid; (iii) when reserves that were general with respect to a loan become specific reserves and there are duplicate reserves as a result; or (iv) when the quality of the loan improves so a reserve amount is no longer necessary relative to the improved loan.
   (e) If all or part of the increase in Tier 1 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 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 Federal and State 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, 550 17th Street, N.W., 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 2 of this ORDER, the Insured Institution shall provide to any subscriber and/or purchaser of the Insured Institution'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 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.
   (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(t) and 325.2(v).

[.3] 3. (a) Within 10 days from the effective date of this ORDER, the Insured Institution shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of September 26, 1994, 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 {{7-31-95 p.C-4029}}collection for the purpose of this paragraph.
   (b) Within 180 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of September 26, 1994 that have not previously been charged off to not more than $6,500,000.
   (c) Within 365 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of September 26, 1994 that have not previously been charged off to not more than $5,000,000.
   (d) The requirements of subparagraphs 3(a), 3(b), and 3(c) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Insured Institution shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Insured Institution is not considered collection for the purpose of this paragraph. As used in subparagraphs 3(b), 3(c), and 3(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.
[.4] 4. (a) Beginning with the effective date of this ORDER, the Insured Institution shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Insured Institution that has been charged off or classified, in whole or in part, "Loss" and is uncollected. Subparagraph 4(a) of this ORDER shall not prohibit the Insured Institution from: (i) renewing or extending the maturity of any credit in accordance with the Financial Accounting Standards Board Statement Number 15 ("FASB 15"); or (ii) extending credit to protect a loan or collateral for purposes such as taxes, insurance or any extension of a similar nature.
   (b) Beginning with the effective date of this ORDER, the Insured Institution shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Insured Institution that has been classified, in whole or part, "Substandard" without the prior written approval of a majority of the board of directors or the loan committee of the Insured Institution. Subparagraph 4(b) of this ORDER shall not prohibit the Insured Institution from: (i) 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 written approval of a majority of the board of directors or the loan committee of the Insured Institution; or (ii) extending credit to protect a loan or collateral for purposes such as taxes, insurance or any extension of a similar nature.
   (c) In connection with subparagraph 4(a) and 4(b) of this ORDER, the Insured Institution shall continue to refrain from:
       (i) accruing 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) engaging in any practice or device which essentially avoids recognition of overdue loans and/or artificially inflates the income of the Insured Institution. For any loans restructured in accordance with FASB 15, consideration should be given to the reasonableness of the modified terms of the loan, since loans should not be restructured in an attempt to conceal credit losses or delay their recognition.
   (d) For the purpose of subparagraph 4(c) of this ORDER, debt is "well secured" if it is secured by:
       (i) collateral in the form of liens on or pledges of real or 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.

{{7-31-95 p.C-4030}}

   [.5] 5. Within 10 days from the effective date of this ORDER, the Insured Institution shall establish and thereafter maintain an adequate allowance for loan and lease losses. Such allowance shall be established by charges to current operating income, together with collection of assets previously charged off. In complying with the provisions of this paragraph, the board of directors shall review the adequacy of the Insured Institution's allowance for loan and lease losses after the end of each quarter but prior to the time the Insured Institution is required to file the applicable Reports of Condition and Income. The minutes of the board of directors meeting at which such review is undertaken shall indicate the results of the review, the amount of any increase in the allowance, and the basis for determination of the amount of the allowance provided.

   [.6] 6. Within 60 days from the effective date of this ORDER, the Insured Institution shall implement the provisions of the Insured Institution's capital restoration and business/profitability plans submitted to the FDIC on or about March 30, 1995, in order to effectively control overhead and other expenses and restore the Insured Institution's profitability. Implementation of these plans shall be in a manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Insured Institution shall eliminate and/or correct the violation of law which is more fully set out on page 8.10 of the Report of Examination of the Insured Institution as of September 26, 1994. In addition, the Insured Institution shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.8] 8. Within 10 days of the date of this ORDER, the Insured Institution shall file with the FDIC amended Consolidated Reports of Condition and Income ("Call Reports") which shall accurately reflect the financial condition of the Insured Institution as of December 31, 1993, March 31, 1994, June 30, 1994 and September 30, 1994 in accordance with the findings of the Report of Examination of the Insured Institution as of September 26, 1994, if such amended Call Reports have not previously been filed by the Insured Institution. Thereafter, during the life of this ORDER, the Insured Institution shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Insured Institution as of the end of the period for which the Reports are filed, including any adjustment in the Insured Institution's books made necessary or appropriate as a consequence of any California Department of Corporations or FDIC examination of the Insured Institution during that reporting period.

   [.9] 9. The Insured Institution shall not pay cash dividends in any amount except when such declaration and payment of dividends have been approved in advance, in writing, by the Regional Director and the Commissioner, which approval shall not be unreasonably withheld.

   [.10] 10. During the life of this ORDER, the Insured Institution shall continue to comply with its Policy for Transactions and Relationships Between Affiliates adopted on June 1, 1994.

   [.11] 11. During the life of this ORDER, the Insured Institution shall refrain from opening any additional offices, including loan production offices, without the prior written consent of the Regional Director and the Commissioner.

   [.12] 12. Following the effective date of this ORDER, the Insured Institution shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Insured Institution's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Insured Institution's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Section, 550 17th Street, N.W., 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.

   [.13] 13. Within twenty (20) days of the end of the first quarter following the effective date of this ORDER, and within thirty (30) days of the end of each quarter thereafter, the Insured Institution shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports shall include a copy of {{7-31-95 p.C-4031}}the Insured Institution's Report of Condition and the Insured Institution's Report of Income. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner have released the Insured Institution in writing from making further reports.

   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 May, 1995.
   Pursuant to delegated authority.

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