Federal Deposit
Insurance Corporation

{{6-30-01 p.C-4876}}    [¶11,693] In the Matter of Finance Factors, LTD., Honolulu, Hawaii, Docket No. 00-001b (1-26-00)

   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 4-13-01; see ¶16,279.)

   [.1] Management—Qualifications Specified
   [.2] Board of Directors—Outside Directors Added to Board
   [.3] Assets—Tier 1 Capital
   [.4] Assets—Adversely Classified Assets—Reduction Required
   [.5] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits
   [.6] Loan Loss Reserve—Establishment of or Increase Required
   [.7] Loans—Internal Grading System Required
   [.8] Violations of Law—Correction of Violations Required
   [.9] Audit—Program Required
   [.10] Strategic Plan—Preparation of Required
{{3-31-00 p.C-4877}}
   [.11] Bank Holding Company—Fees Paid to Bank Holding Companies, Limitations Imposed On
   [.12] Dividends—Dividends Restricted
   [.13] Reports of Condition and Income—Amendment Required
   [.14] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of

FINANCE FACTORS, LTD.
HONOLULU, HAWAII
(Insured State Nonmember Bank)
ORDER TO
CEASE AND DESIST
FDIC-00-001b
   Finance Factors, Ltd., Honolulu, Hawaii ("Bank"), 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 Bank as of the June 8, 1999 examination of the Bank, utilizing financial information as of March 31, 1999 ("1999 Examination"), 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 January 19, 2000, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges, the Bank 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 as of the 1999 Examination, the Bank 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:

   (a) operating without sufficient management, including the lack of a chief financial officer and a senior loan officer;
   (b) operating without sufficient equity capital and reserves in relation to the volume and quality of loans held by the Bank;
   (c) operating with a large volume of poor quality loans;
   (d) operating with an inadequate allowance for loan and lease losses;
   (e) following lax lending and credit administration practices;
   (f) operating in such a manner as to produce low earnings; and
   (g) operating in violation of the following laws and/or regulations:

   (i) in two instances, Section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, made applicable to state nonmember insured institutions by section 18(j)(1) of the Act, 12 U.S.C. § 1828(j)(1), as more fully described in the Report of Examination dated June 8, 1999;
   (ii) in four instances, 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) of the Act, 12 U.S.C. § 1828(j)(1), as more fully described in the Report of Examination dated June 8, 1999;
   (iii) in one instance, Part 362 of the FDIC's Rules and Regulations, 12 C.F.R. Part 362, as more fully described in the Report of Examination dated June 8, 1999;
   (iv) in one instance, Section 325.5 of the FDIC's Rules and Regulations, 12 C.F.R. § 325.5, as more fully described in

the Report of Examination dated June 8, 1999; and
   (v) in one instance, Section 326.4 of the FDIC's Rules and Regulations, 12 C.F.R. § 326.4, as more fully described in the Report of Examination dated June 8, 1999.

   [.1] 1. The Bank 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 Bank. Management shall include the following:
   (i) a senior lending officer with significant appropriate lending, collection, and loan supervision experience and experience in upgrading a low quality loan portfolio; and
   (ii) a chief financial officer with experience in maintaining a bank's books and records in accordance with GAAP principles and Call Report instructions.

   (b) The qualifications of management shall be assessed on its ability to:
   (i) comply with the requirements of this ORDER;
   (ii) operate the Bank in a safe and sound manner;
   (iii) comply with applicable laws and regulations; and
   (iv) enhance all aspects of the Bank and maintain the Bank in a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.
   (c) During the life of this ORDER, the Bank 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 Bank'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 Bank 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.

   [.3] 3. (a) Within 30 days from the effective date of this ORDER, the Bank shall have Tier 1 capital in such an amount as to equal or exceed nine percent (9.0%) of the Bank's total assets.
   (b) Within 120 days from the effective date of this ORDER, the Bank shall have Tier 1 capital in such an amount as to equal or exceed 9.5 percent of the Bank's total assets.
   (c) Within 210 days from the effective date of this ORDER, the Bank shall have Tier 1 capital in such an amount as to equal {{3-31-00 p.C-4879}} or exceed 9.75 percent of the Bank's total assets.
   (d) Within 240 days from the effective date of this ORDER, and thereafter, during the life of this ORDER, the Bank shall have Tier 1 capital in such an amount as to equal ten percent (10.0%) of the Bank's total assets.
   (e) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraphs 3(a), 3(b), 3(c), and 3(d) 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.
   (f) 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 parent holding company; or
   (iv) any other means acceptable to the Regional Director and the Commissioner; or
   (v) any combination of the above means.

   (i) 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).

   (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.

   (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) engage in any practice or device which essentially avoids recognition of overdue loans and/or artificially inflates the income of the Bank. 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.

   (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.

   [.6] 6. During the life of this ORDER, the Bank shall 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 Bank's allowance for loan and lease losses 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.

   [.7] 7. During the life of this ORDER, the {{3-31-01 p.C-4881}} Bank shall enhance and maintain an effective internal loan grading system, which shall, at a minimum, address the issues raised in the Report of Examination dated June 8, 1999. Such system 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.

   [.8] 8. Within 60 days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner its plan for the elimination and/or correction of all violation of laws which are more fully set out in the Report of Examination of the Bank dated June 8, 1999, and which have not, heretofore, been corrected. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall implement an audit program which, at a minimum, addresses the issues raised in the Report of Examination dated June 8, 1999. Such program 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.

   [.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall prepare and submit to the Regional Director and the Commissioner a written business/ strategic plan covering the overall operation of the Bank, which shall include a plan to control overhead and other expenses and restore the Bank's profitability. 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.

   [.11] 11. During the life of this ORDER, the Bank shall not pay, nor agree to pay, any management or consultant fees to its holding company or any of its affiliates, which have not previously been approved by the Regional Director and the Commissioner, without:

   (a) providing a minimum of thirty (30) days advance written notice to the Regional Director and the Commissioner;
   (b) originating and executing a written contract designed to clearly define services to be rendered that cannot be provided by the Bank's existing staff; and
   (c) outlining appropriate documentation needed for the payment of services rendered, including a cost analysis of actual services provided.

   (a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
   (b) that after payment of such dividends, the ratio of Tier 1 capital to total assets of the Bank will be not less than ten (10.0%) percent and the allowance for loan and lease loses shall be at an adequate level;
   (c) that such declaration and payment of dividends shall be approved in advance by the board of directors; and
   (d) that such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director and the Commissioner, which approval shall not be unreasonably withheld.