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FDIC Enforcement Decisions and Orders

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   [11,555] In the Matter of Realty Finance, Inc., Hilo, Hawaii, Docket No. 98-88b (9-23-98)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 1-5-00; see ¶16,249)
   [.1] Management—Qualifications Specified
   [.2] Board of Directors—Outside Directors Added to Board
   [.3] Capital—Increase Required
   [.4] Assets—Adversely Classified Assets—Reduction Required
   [.5] Loans—Extensions of Credit—To Borrowers With Existing Adversely Classified Credits
   [.6] Loan Policy—Preparation or Revision of Policy Required
   [.7] Loan Loss Reserve—Establishment of or Increase Required
   [.8] Profit Plan—Preparation of Plan Required
   [.9] Strategic Plan—Preparation of Required
   [.10] Violations of Law—Correction of Violations Required
   [.11] Bank Operations—Internal Controls—Correction of Weaknesses Required
   [.12] Dividends—Dividends Restricted
   [.13] Shareholders—Disclosure of Cease and Desist Order Required

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In the Matter of

REALTY FINANCE, INC.
HILO, HAWAII
(Insured State Nonmember Thrift)
ORDER TO CEASE AND DESIST
FDIC-98-88B

   Realty Finance, Inc., Hilo, Hawaii ("Thrift"), 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 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") and the Commissioner of Financial Institutions, Division of Financial Institutions, Department of Commerce and Consumer Affairs, State of Hawaii ("Commissioner"), dated September 11, 1998, 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 Thrift consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC and the Commissioner.
   The FDIC and the Commissioner 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 violation of laws and/or regulations. The FDIC and the Commissioner, pursuant to Hawaii Revised Statutes, §§ 412: 2-301 and 412:2-305, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Thrift, 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) 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 allowance for loan and lease losses;
   (e) following hazardous lending and lax collection practices;
   (f) operating with inadequate internal routine and controls policies;
   (g) operating in such a manner as to produce operating losses; and
   (h) operating in violation of Part 362.3(d) of the FDIC's Rules and Regulations, 12 C.F.R. 362.3(d), as more fully described on page 37 of the Report of Examination dated January 13, 1998; section 412:3-112(a)(1) of the Hawaii Revised Statutes, as more fully described on page 37 of the Report of Examination dated January 13, 1998; and section 412:9-304(1) of the Hawaii Revised Statutes, as more fully described on page 38 of the Report of Examination dated January 13, 1998;
   IT IS FURTHER ORDERED, that the Thrift, its institution-affiliated parties, and its successors and assigns, 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 shall 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 requiring particular attention. Each member of management shall be provided appropriate written authority from the Thrift'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 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.
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   (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 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 120 days from the effective date of this ORDER, the Thrift shall cause its articles of incorporation or bylaws or other governing corporate instrument to be amended to require that its Board of Directors include a minimum of two additional outside members and shall effect the election of the two additional outside directors.

   [.3] 3. (a) Within 90 days from the effective date of this ORDER, the Thrift shall increase Tier 1 capital by no less than $350,000, and within 180 days shall have Tier 1 capital in such an amount as to equal or exceed ten (10.0) percent of the Thrift's total assets. Thereafter, 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.
   (b) Within 60 days from the effective date of this ORDER, the Thrift shall develop and adopt a plan to meet and maintain 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 and the Commissioner 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 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 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, shareholders, and/or parent holding company 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 allowance for loan and lease losses.
   (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 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, 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 convert- {{11-30-98 p.C-4620}}ibility 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(t) and 325.2(v).

   [.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" and one-half of the assets classified "Doubtful" as of January 13, 1998, 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 90 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of January 13, 1998 that have not previously been charged off to not more than $1,300,000.
   (c) Within 120 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of January 13, 1998 that have not previously been charged off to not more than $1,000,000.
   (d) Within 240 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of January 13, 1998 that have not previously been charged off to not more than $800,000,000.
   (e) Within 360 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of January 13, 1998 that have not previously been charged off to not more than $650,000,000.
   (f) The requirements of subparagraphs 4(a), 4(b), 4(c), 4(d), 4(e), and 4(f) 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), 4(d), 4(e), and 4(f) 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 the Commissioner.

   [.5] 5. (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 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. The requirements of this paragraph shall not prohibit the Thrift 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 Thrift's failure to extend further credit to a particular borrower would be detrimental to the best interests of the Thrift. 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 Thrift to extend such credit would be detrimental to the best interests of the Thrift;
       (ii) that the Thrift's position would be improved thereby; and
       (iii) how the Thrift's position would be improved.
   The signed certification shall be made a part of the minutes of the board of directors or {{10-31-99 p.C-4621}}designated committee, and a copy of the signed certification shall be retained in the borrower's credit file.

   [.6] 6. Within 60 days from the effective date of this ORDER, the Thrift shall revise, adopt, and implement a written lending and collection policy to provide effective guidance and control over the Thrift's lending function, which policy shall include, at a minimum, revisions to address all items of criticism contained within the January 13, 1998 Report of Examination as well as specific guidelines for placing loans on a nonaccrual basis. In addition, the Thrift shall obtain adequate and current documentation for all loans in the Thrift's loan portfolio. 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.

   [.7] 7. Within 60 days from the effective date of this ORDER, the board of directors shall review the adequacy of the allowance for loan and lease losses and establish 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." The policy 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 allowance for loan and lease losses 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 and lease 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 allowance shall be remedied in the calender 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.

   [.8] 8. Within 60 days from the effective date of this ORDER, the Thrift shall formulate and implement a written profit plan. This plan shall be forwarded to the Regional Director and to the Commissioner for review and comment and shall address, at a minimum, the following:
   (a) goals and strategies for improving and sustaining the earnings of the Thrift, including:

       (i) an identification of the major areas in, and means by which, the board of directors will seek to improve the Thrift's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Thrift to compare actual figures with budgetary projections, including a description of any material (over 10%) differences; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (b) coordination of the Thrift's loan, investment, and operating policies, and budget and profit planning, with the funds management policy.

   [.9] 9. Within 120 days of the effective date of this ORDER, the Thrift shall develop and submit to the Regional Director and the Commissioner a written three-year strategic plan. Such plan shall include specific goals for the dollar volume of total loans, total investment securities, and total deposits as of December 31, 1999, December 31, 2000, and December 31, 2001. For each time frame, the plan will also specify the anticipated average maturity and average yield on loans and securities; the average maturity and average cost of deposits; the level of earning assets as a percentage of total assets; and the ratio of net interest income to average earning assets. The plan shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.10] 10. Within 120 days from the effective date of this ORDER, the Thrift shall eliminate and/or correct all violations of laws which are more fully set out on pages 37 and 38 of the Report of Examination dated January 13, 1998. The Regional Director and the Commissioner shall determine whether the violations of federal and state laws, respectively, have been satisfactorily eliminated and/or corrected. In addition, the Thrift shall {{10-31-99 p.C-4622}}take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.11] 11. (a) 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. Such policy shall, at a minimum, eliminate and/or correct all internal routine and control deficiencies as more fully set forth on page 59 of the Report of Examination of the Thrift dated January 13, 1998 and shall guarantee that the Thrift will take all necessary steps to ensure future compliance with all applicable laws and regulations. Such policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
   (b) Within 90 days from the effective date of this ORDER, the Thrift shall develop an internal audit program that establishes procedures to protect the integrity of the Thrift's operational and accounting systems. The program 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 Thrift shall not pay cash dividends without the prior written consent of the Regional Director and the Commissioner.

   [.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, 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.
   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 released the Thrift 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 and the Commissioner.
   Pursuant to delegated authority and the authority of the Commissioner under Chapter 412, Code of Financial Institutions, Hawaii Revised Statues.
   Dated at San Francisco, California, this 23rd day of September, 1998.

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