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FDIC Enforcement Decisions and Orders

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   [11,576] In the Matter of Pacific Thrift and Loan Company, Woodland Hills, California, Docket No. 98-114b (12-14-98)

   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.

   [.1] Management—Qualifications Specified
   [.2] Capital—Increase Required
   [.3] Loan Loss Reserve—Establishment of or Increase Required
   [.4] Mortgage Banking Operations—Interest Only Receivables
   [.5] Strategic Plan—Preparation of Required
   [.6] Violations of Law—Correction of Violations Required
   [.7] Asset/Liability Management—Preparation or Revision of Asset/Liability Management Policy Required
   [.8] Dividends—Dividends Restricted
   [.9] Compensation—Bonuses, FDIC Approval Required
   [.10] Affiliated Organizations and Persons
   [.11] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of

PACIFIC THRIFT AND LOAN COMPANY
WOODLAND HILLS, CALIFORNIA
(Insured State Nonmember Institution)
ORDER TO
CEASE AND DESIST

FDIC-98-114b

   Pacific Thrift and Loan Company, Woodland Hills, California ("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 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 legal counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated December 10, 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 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 Institution had engaged in unsafe or unsound banking practices and had committed a violation 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 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) operating with inadequate management;
   (b) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Institution;
   (c) operating with a large volume of poor quality assets, principally including the Interest-Only Receivables;
   (d) operating with a concentration of business in sub-prime mortgage origination and pass through sales for cash and Interest-Only Receivables;
   (e) operating with inadequate policies and procedures in connection with asset/liability management;
   (f) operating with inadequate internal routine and controls policies; and
   (g) operating in violation of the following laws and/or regulations:

    (i) Section 23A of the Federal Reserve Act, 12 U.S.C. §371c, made applicable to state nonmember insured institutions by Section 18(j)(1), as more fully described on Page(s) 36–38 of the Report of Examination as of April 27, 1998;
       (ii) Section 23B of the Federal Reserve Act, 12 U.S.C. §371c-1, made applicable to state nonmember insured institutions by Section 18(j)(1), as more fully described on Page(s) 36–38 of the Report of Examination as of April 27, 1998;
       (iii) Section 18025 of the California Financial Code, Cal. Fin. Code §18025 (West 1977), as more fully described on Page(s) 36–38 of the Report of Examination as of April 27, 1998;
       (iv) Section 18448 of the California Financial Code, Cal. Fin. Code §18448 (West 1977), as more fully described on Page(s) 36–38 of the Report of Examination as of April 27, 1998; and
       (v) Section 18455(b) of the California Financial Code, Cal. Fin. Code §18455(b) (West 1977), as more fully described on Page(s) 36–38 of the Report of Examination as of April 27, 1998.
   IT IS FURTHER ORDERED, that the Institution, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. The Institution shall have and retain qualified management according to the following criteria:
   (a) Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Institution. Management shall include a chief executive officer with proven ability in managing an Institution of comparable size and business plan, and experience restoring a bank to a safe and sound condition. Management shall also include a senior lending officer with significant appropriate lending, collection, and loan supervision experience and experience in upgrading a low quality loan portfolio. Management shall also include a chief financial officer with experience in maintaining a bank's books and records in accordance with GAAP principles and Call Report Instructions. Each member of management shall be provided appropriate written authority from the 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 Institution in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
       (iv) restore all aspects of the 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 Institution shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") in writing when it proposes to add any individual to the 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 Institution may not add any individual to its Board of Directors or employ any individual as a notice of disapproval pursuant to Section 32 of the Act, 12 U.S.C. §1831i.

   [.2] 2. (a) On or before January 31, 1999, the Institution shall achieve and maintain during the life of this ORDER, Tier 1 capital in such an amount as to equal or exceed eight (8.0) percent of the Institution's total assets.
   (b) On or before June 30, 1999, the Institution shall achieve, and thereafter maintain during the life of this ORDER, Tier 1 risk-based capital of no less than six (6.0) percent and total risk-based capital of no less than ten (10.0) percent.
   (c) The level of Tier 1 capital, Tier 1 risk-based capital, and total risk-based capital to be maintained during the life of this ORDER pursuant to Subparagraphs 2(a) and (b) 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 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) the direct contribution of cash by the Board of Directors, shareholders, and/or parent holding company; or
       (iv) any other means acceptable to the Regional Director; or
       (v) any combination of the above means.
Any increase in Tier 1 capital necessary to met the requirements of Paragraph 2 of this ORDER may not be accomplished through a deduction from the Institution's allowance for loan and lease losses and may not be accomplished through a deduction of the Institution's loan loss reserves.
   (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 Institution's securities (including a distribution limited only to the Institution's existing shareholders), the Institution shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Institution 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 convertibility factor, shall be presented to the Regional Director for prior approval.
   (f) In complying with the provisions of Paragraph 2 of this ORDER, the Institution shall provide to any subscriber and/or purchaser of the 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 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 Institution's securities who received or was tendered the information contained in the Institution's original offering materials.
   (g) For the purposes of this ORDER, the terms "Tier 1 capital," "Tier 1 risk-based capital," "total risk-based 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), (u), (v), and (w).

   [.3] 3. Within 10 days from the effective date of this ORDER, the Institution shall establish and thereafter maintain an adequate allowance for loan loss reserves. 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 Institution's allowance for loan loss reserves prior to the end of each quarter. 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.

   [.4] 4. The Institution shall take the following steps with regard to its Interest-Only Receivables associated with its mortgage banking operations:
   (a) By June 30, 1999, the amount of the Institution's Interest-Only Receivables, net of related booked tax liabilities, shall be no more than 100% of the Institution's total capital. The requirements of this Subparagraph are not to be construed as standards for future operations.
   (b) No additional Interest-Only Receivables shall be acquired or booked during the life of this Order without prior written consent of the Regional Director.
   (c) The Institution shall obtain annual independent evaluations of the Interest-Only Receivables. The annual evaluations are required until the amount of Interest-Only Receivables represents 50% or less of Tier 1 Capital.
   (d) The Institution shall cause to be performed quarterly external valuations and cash flow analyses on the Interest-Only Receivables. The valuation shall utilize actual rather than estimated pass through rates for each of the pools, and shall include a calculation for accrued interest payable to those entities which have advanced premiums. The Institution shall stratify its loan pools by maturity, coupon rate and geographic location. Furthermore, the Institution shall consider in its cash flow analysis the impact of the Interest-Only class-holder of the security. The analyses required in this Paragraph shall be submitted along with the quarterly progress report to the Regional Director.

   [.5] 5. Within 60 days from the effective date of this ORDER, the Institution shall prepare, adopt and submit to the Regional Director a written business/strategic plan covering the overall operations of the Institution for the years 1998 through 2000. The plan shall include the limitations established by the Interest-Only Receivables provisions set forth in Paragraph 4 of this Order. The plan shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.6] 6. By February 27, 1999, the Institution shall eliminate and/or correct all violation of laws and/or regulations which are more fully set out on Page(s) 36–38 of the Report of Examination of the Institution as of April 27, 1998. In addition, the Institution shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.7] 7. By February 27, 1999, the Institution shall develop or revise, adopt, and implement a written asset/liability management policy. At a minimum, the policy shall establish risk tolerance levels for income and provide annual independent audits of the Institution's interest rate risk process associated with the Institution's mortgage banking operations. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.8] 8. The Institution shall not pay cash dividends or distribute assets to any affiliate without the prior written consent of the Regional Director.

   [.9] 9. During the life of this Order, the Institution shall not enter into any executive compensation and/or bonus agreements without prior approval of the FDIC.

   [.10] 10. Within 60 days from the effective date of this Order, the Institution shall develop, adopt, and implement a written policy governing the relationships between the Institution and its affiliates and shall specifically address acceptable volumes and terms of the Institution's purchase or sale of affiliate/affiliate originated assets; common functional authority between the Institution and its affiliate's directors, officers or employees, and the degree and constraints of functional control originating from outside the Institution. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.11] 11. Following the effective date of this ORDER, the Institution shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Institution's next shareholder communication and also in conjunction with its notice or proxy statement preceding the 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.
   12. 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 Institution shall furnish written progress reports to the Regional Director 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 Institution's Report of Condition and the Institution's Report of Income. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the 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.
   Pursuant to delegated authority.
   Dated at San Francisco, California, this 14th day of December, 1998.

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