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FDIC Enforcement Decisions and Orders

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   [11,188] In the Matter of Franklin Thrift and Loan Association, Orange, Calif., Docket No. FDIC-95-27b (6-20-95).

   Bank ordered to increase the level of participation of its board of directors; expand the board to increase the number of outside directors; retain qualified management; maintain a minimum level of Tier 1 capital; reduce adversely classified assets; restrict further extensions of credit to borrowers with adversely classified loans; revise its written lending and collection policies; reduce a concentration of credit; establish and maintain an adequate allowance for loan and lease losses; eliminate or correct all violations of law; establish a funds management and liquidity policy; pay cash dividends only with the prior written consent of the FDIC; notify shareholders of the cease and desist order; and furnish written progress reports on compliance with order. (This order was terminated by order of the FDIC dated 6-10-97; see 16,171.)
   [.1] Board of Directors—Meetings—Frequency
   [.2] Board of Directors—Election—Outside Directors Added
   [.3] Management—Qualifications Specified
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   [.4] Capital—Tier 1 Capital—Increase/Maintain
   [.5] Assets—Adversely Classified—Reduce
   [.6] Loans-Extensions of Credit to Borrowers with Existing Adversely Classified Loans
   [.7] Loan Policy—Written Revision—Minimum Requirements
   [.8] Loans—Concentrations of Credit—Reduction Plan
   [.9] Loans and Lease Losses—Establish/Maintain Adequate Allowance
   [.10] Violations of Law—Eliminate/Correct
   [.11] Funds Management and Liquidity—Policy Required
   [.12] Dividends—Restricted
   [.13] Shareholders—Disclosure of Cease and Desist Order
   [.14] Cease and Desist Order—Compliance—Progress Reports

In the Matter of

FRANKLIN THRIFT AND LOAN
ASSOCIATION

ORANGE,CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-95-27b

   Franklin Thrift and Loan Association, Orange, 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 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 1, 1995, 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 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 violations of laws 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 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 violations of laws and/or regulations:
   (a) operating with inadequate Board supervision;
   (b) operating with an insufficient number of Board members;
   (c) operating with inadequate management;
   (d) operating with a large volume of poor quality loans;
   (e) operating without an acceptable methodology for determining the adequacy of the allowance for loan and lease losses;
   (f) operating with inadequate loan review procedures;
   (g) operating with inadequate provisions for liquidity and funds management;
   (h) operating in such a manner as to produce inconsistent operating profits;
   (i) operating with an inadequate budget and profit plan;
   (j) operating with a large concentration of credit;
   (k) operating with inadequate lease and real estate loan policies; and
   (l) operating in violation of the following laws and regulations:
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       (i) operating in violation of Section 7(b)(3) of the Act, 12 U.S.C. § 1817(b)(3), as more fully described on Page 8.8 of the Report of Examination as of September 30, 1994;
       (ii) operating in violation of Section 337.6(b)(2)(i) of the FDIC Rules and Regulations, 12 C.F.R. § 337.6(b)(2)(i), as more fully described on Page 8.7 of the Report of Examination as of September 30, 1994; and
       (iii) operating in violation of Section 303.2(a) of the FDIC Rules and Regulations, 12 C.F.R. § 303.2(a), as more fully described on Page 8.7 of the Report of Examination as of September 30, 1994.
   IT IS FURTHER ORDERED that the Insured Institution, its institution-affiliated parties, and its successors and assigns take affirmative action as follows:

   [.1] 1. Within 30 days from the effective date of this ORDER, the Board of Directors shall increase its participation in the affairs of the Insured Institution, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Insured Institution's activities, consistent with the role and expertise commonly expected for directors of insured institutions of comparable size. This participation shall include meetings to be held no less frequently than monthly at which, at a minimum, the following areas are reviewed and approved: reports of income and expenses; new, overdue, renewal, 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.

   [.2] 2. With 180 days from the effective date of this ORDER, the Insured Institution shall expand its Board of Directors to include three (3) additional directors (one of whom may be the approved president and chief executive officer), acceptable to the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Commissioner of Corporations for the State of California ("Commissioner"), who are independent from the present Board and who are not employed by the Insured Institution (except for the president and chief executive officer) in order to provide the Insured Institution with openminded and impartial decisions in the monitoring of its operations including expenses and asset quality. The two additional directors other than the president and chief executive officer shall be individuals who are not employed by the Insured Institution, do not own more than 5% of the stock of the Insured Institution or its holding company and are not related, by blood or marriage, to employees or shareholders of the Insured Institution.

   [.3] 3. During the life of this ORDER, the Insured Institution shall have and thereafter 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 a financial institution and experience in upgrading low quality assets. Management should also include a controller or chief financial officer with appropriate experience in investments, liquidity and funds management, commensurate for institutions of comparable size and with comparable type and quality of investments. Furthermore, management should include a senior lending officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Insured Institution's loans. The foregoing requirement for a senior lending officer may be satisfied by the appointment of a president and chief executive officer with the requisite experience, subject to approval of the Regional Director and the Commissioner. 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 {{8-31-95 p.C-4049}}Insured Institution shall notify the Regional Director and the 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. § 1831i.

    [.4] 4. (a) During the life of this ORDER, the Insured Institution shall maintain Tier 1 capital in such an amount as to equal or exceed nine (9.0) percent of the Insured Institution's total assets.
       (b) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraph 4(a) shall be in addition to a fully funded loan loss reserve, the adequacy of which shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

    [.5] 5. (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 30, 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 collection for the purpose of this Paragraph.
       (b) Within 90 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of September 30, 1994 that have not previously been charged off to not more than $600,000.
       (c) Within 180 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of September 30, 1994 that have not previously been charged off to not more than $400,000.
       (d) Within 360 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of September 30, 1994 that have not previously been charged off to not more than $300,000.
       (e) The requirements of Subparagraphs 5(a), 5(b), 5(c), and 5(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 5(b), 5(c), 5(d), and 5(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.

    [.6] 6. (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. 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) The immediately preceding Paragraph 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;
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         (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.

   [.7] 7. 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, with particular attention to diversifying the Bank's loan portfolio. Initial revisions to the Insured Institution's written lending and collection policies shall include, at a minimum, provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans which are classified "Substandard" as of September 30, 1994 or by the FDIC or the Commissioner in subsequent Reports of Examination and all other loans 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. 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.

   [.8] 8. Within 90 days from the effective date of this ORDER, the Insured Institution shall develop a plan to be instituted by the Insured Institution which shall reduce the Worthington Ford Concentration of Credit. The plan 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.

    [.9] 9. (a) During the life of this ORDER, the Insured Institution shall establish and thereafter maintain an adequate allowance for loan and lease losses;
       (b) 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 allowance for loan and lease losses. For the purpose of this determination, the adequacy of the allowance shall be determined after the charge-off of all loans or other items classified "Loss."
       (c) The policy referred to in Subparagraph 9(b) shall provide for a review of the allowance 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 and lease loss allowance may be properly reported in the quarterly Reports of Condition and Income.
         (i) The review should focus on the results of the Insured Institution's internal loan review, loan and lease 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 allowance shall be remedied in the calendar quarter it is discovered, prior to submitting the Report of Condition, by a charge to current operating earnings.
         (ii) 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 allowance for loan and lease losses consistent with the allowance on loan and lease loss 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.

   [.10] 10. Within 360 days from the effective date of this ORDER, the Insured Institution shall eliminate and/or correct all violations of laws which are more fully set out on Pages 8.7 and 8.8 of the Report of Examination of the Insured Institution as of September 30, 1994, except that the Insured Institution shall not be required to redeem those certificates for brokered deposits which do not contain provisions permitting the early redemption of such thrift certificates by the Insured Institution upon notice to the thrift account holder. In addition, the Insured Institution shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.11] 11. Within 90 days from the effective date of this ORDER, the Insured Institution {{8-31-95 p.C-4051}}shall develop, 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. The Insured Institution shall not pay cash dividends without the prior written consent of the Regional Director and the Commissioner, which consent shall not be unreasonably withheld.

   [.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. 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 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 the Insured Institution's Report of Condition and the Insured Institution's Report of Income, the internal quarter-end problem loan report, and the quarter-end loan loss reserve adequacy analysis. 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 20th day of June, 1995.
   Pursuant to delegated authority.

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