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FDIC Enforcement Decisions and Orders

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{{1-31-05 p.C-4904}}
   [¶:11,700] In the Matter of Franklin Thrift & Loan Association, Orange, California, Docket No. 00-013b (3-20-00)

   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 12-10-04; see ¶16,404.)

   [.1] Management—Qualifications Specified
   [.2] Board of Directors—Responsibilities of Directors Specified
   [.3] Assets—Tier 1 Capital
   [.4] Assets—Adversely Classified Assets—Reduction Required
   [.5] Loan Policy—Preparation or Revision of Policy Required
   [.6] Loan Loss Reserve—Policy for Determining Accuracy of
   [.7] Audit—Required
   [.8] Profit Plan—Preparation of Plan Required
   [.9, 11] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required
   [.10] Violations of Law—Correction of Violations Required
   [.12] Reports of Condition and Income—Amendment Required
   [.13] Bank Holding Company—Fees Paid to Bank Holding Companies, Limitations Imposed on
   [.14] Dividends—Dividends Restricted
   [.15] Bonuses—Bonuses Restricted
   [.16] Brokered Deposits—Notice to FDIC
   [.17] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of

FRANKLIN THRIFT &: LOAN
ASSOCIATION

ORANGE, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-00-013b

   Franklin Thrift & Loan Association, Orange, California ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices alleged to have been committed by the Bank 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 March 7, 2000, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, the Bank consented to the issuance of an ORDER TO {{5-31-00 p.C-4905}}CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, 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/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 Bank;
       (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 provisions for liquidity and funds management;
       (g) operating with inadequate internal routine and controls policies;
       (h) operating in such a manner as to produce operating losses;
       (i) operating in violation of Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325, as more fully described on page 34 of the Report of Examination as of October 25, 1999; and
       (j) operating in contravention of the FDIC's Statement of Policy on Risk-Based Capital, 12 C.F.R. Part 325, Appendix A, as more fully described on page 34 of the Report of Examination as of October 25, 1999.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1]1. During the life of this ORDER, the Bank shall have and retain qualified management acceptable to the Regional Director.
(a) 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) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, liquidity, and sensitivity to market risk.
   (b) During the life of this ORDER, the Bank 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 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.
   (c) 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.

   [.2]2. (a) During the life of this ORDER, the Board of Directors shall increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and of the supervision of all of the Bank's activities, consistent with the role and expertise commonly expected for directors of banks of comparable size. This participation shall include meetings to be held no less frequently than monthly at which, at a minimum, the following areas shall be reviewed and approved: reports of income and expenses; 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. In addition, the Board will comply with the recommendations made on pages 1 and 9 of the Report of Examination as of October 25, 1999, with regard to improving Board minutes.
{{5-31-00 p.C-4906}}
   (b) By June 30, 2000, The Bank shall add two additional outside directors to the Board of Directors.

   [.3]3. (a) During the life of this ORDER, the Bank shall have Tier 1 capital of no less than $750,000 and shall maintain Tier 1 capital in such an amount as to equal or exceed ten (10.0%) percent of the Bank's total assets.
   (b) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Paragraph 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 as determined at subsequent examinations and/or visitations.
   (c) Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3(a) 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 meet the requirements of Paragraph 3(a) of this ORDER may not be accomplished through a deduction from the Bank's allowance for loan and lease losses without the prior written consent of the Regional Director.
   (d) If all or part of the amount of Tier 1 capital required by Paragraph 3(a) 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 Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank 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.
   (e) In complying with the provisions of Paragraph 3(a) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank'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 Bank 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 Bank's securities who received or was tendered the information contained in the Bank's original offering materials.
   (f) 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 Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of October 25, 1999, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   (b) By June 30, 2000, the Bank shall have reduced the total of all assets classified "Substandard" and "Doubtful" as of October 25, 1999 that have not previously been charged off, to not more than $1,500,000.
   (c) By September 30, 2000, the Bank shall have reduced the total of all assets classified {{5-31-00 p.C-4907}}"Substandard" and "Doubtful" as of October 25, 1999 that have previously been charged off, to not more than $1,300,000.
   (d) By December 31, 2000, the Bank shall have reduced the total of all assets classified "Substandard" and "Doubtful" as of October 25, 1999 that have not previously been charged off, to not more than 1,100,000.
   (e) By March 31, 2001, the Bank shall have reduced the total of all assets classified "Substandard" and "Doubtful" as of October 25, 1999 that have not previously been charged off, to not more than $950,000.
   (f) By June 30, 2001, the Bank shall have reduced the total of all assets classified "Substandard" and "Doubtful" as of October 25, 1999 that have not previously been charged off, to not more than $800,000.
   (g) 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 Bank shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Bank 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.

   [.5]5. (a) Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Bank's lending functions. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.
   (b) The initial revisions to the Bank's loan policy and practices shall comply with the recommendations set forth in the Report of Examination as of October 25, 1999, as described more fully on pages 21 through 25 of the Report of Examination. The revisions to the loan policy shall also include, at a minimum, the following:
       (i) provisions which comply with the Federal Financial Institutions Examination Council's Uniform Retail Credit Classification and Account Management Policy to provide specific guidance governing payment deferrals in relations to the Bank's consumer loan portfolio;
       (ii) provisions, consistent with FDIC instructions for the preparation of Reports of Condition and Income, under which the accrual of interest income is discontinued and previously accrued interest is reversed on any loan which has been charged-off or any loan which has a specific reserve in lieu of being charged-off;
       (iii) provisions which require complete loan documentation, adequate analysis, realistic repayment terms, and current credit information adequate to support the outstanding indebtedness of the borrower;
       (iv) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values;
       (v) provisions which prohibit the practice of creating balloon balances at the maturity of any vehicle loans for the cost of force-placed single-interest insurance. In the future, such costs must be paid in advance or monthly over the term of insurance.
       (vi) the Board of Directors shall adopt procedures whereby compliance with the revised loan policy is monitored and responsibility for exceptions thereto assigned. The procedures adopted shall be reflected in minutes of a Board of Directors meeting at which all members are present and the vote of each is noted.

   [.6]6. (a) Within 10 days of the effective date of this ORDER, the Bank shall make charges to current operating income to remedy the deficiency in the allowance for loan and lease losses noted in the Report of Examination as of October 25, 1999.
   (b) Within 30 days of the effective date of this ORDER, the Board of Directors shall revise and adopt the Bank's methodology for determining the adequacy of the allowance for loan and lease losses to include the recommendations more fully described on pages 25 through 27 of the Report of Examination as of October 25, 1999. The revisions should include provisions with regard to:
       (i) stratifying the reserve analysis to distinguish between First Time Buyer {{5-31-00 p.C-4908}}("FTB") and Non-FTB loans to account for the higher historical FTB losses;
       (ii) increasing the reserve factors for loans categorized by the Bank as "Special Mention" and "Substandard" Loans; and
       (iii) including and/or increasing reserves against insurance premium balloon balances.
   (c) Additionally, during the life of this ORDER, the Board of Directors shall fully implement its methodology for determining the adequacy of the allowance for loan and lease losses and shall maintain a fully adequate 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 shall 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. The review should focus on the results of the Bank'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 calendar 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. Upon completion of the review, the Bank shall increase and maintain its allowance for loan and lease losses consistent with the allowance for loan and leases loss policy established. Such methodology and its implementation shall be satisfactory to the Regional Director as determined at subsequent examinations and/or visitations.

   [.7]7. (a) Within 90 days of the effective date of this ORDER, the Bank shall have an audit conducted and a written report provided to the Regional Director on the following:

       (i) balloon payments due on consumer loans for the payment of simple-interest force-placed insurance as more fully described on pages 22 through 24 of the Report of Examination as of October 25, 1999; and
       (ii) accounts receivable due from CNI Insurance as more fully described on pages 29 through 30 of the Report of Examination as of October 25, 1999.
   (b) Within 90 days from the date of this ORDER, the Bank shall charge-off any unreconciled balances found as a result of the audit conducted pursuant to the requirement set forth above in Paragraph 7(a).

   [.8]8. Within 30 days from the effective date of this ORDER, the Bank shall formulate and implement a written profit plan. This plan shall be forwarded to the Regional Director for review and comment and shall include the goals and strategies for improving and sustaining the earnings of the Bank, including, at a minimum:

       (i) realistic and comprehensive budgets, with the first such budget to be provided within 30 days of the effective date of this ORDER, and subsequent budgets to be provided to the Regional Director on an annual basis by November 30th of each year;
       (ii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
       (iii) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   [.9]9. Within 30 days of the effective date of this ORDER, the Bank shall submit a revised liquidation plan, that will reflect changes in the Bank's balance sheet and ongoing actions necessitated by the requirements of this document. The plan and its implementation shall be in a form and manner acceptable to the Regional Director. The Bank shall operate within the parameters of the submitted liquidation plan. Any proposed major deviations or material changes from the submitted plan shall receive the prior written approval of the Regional Director.

   [.10]10. On or before March 31, 2000, and during the life of this ORDER, the Bank shall cease to operate in contravention of the FDIC's Statement of Policy on Risk-Based Capital, 12 C.F.R. Part 325, as more fully described on page 34 of the Report of Examination of the Bank as of October 25, 1999. For the purpose of determining the {{6-30-00 p.C-4909}}correction of the violation relative to capital standards embodied in Part 325 of the FDIC's Rules and Regulations, the Bank's compliance with the provisions outlined in Paragraph 3(a) of this ORDER will constitute correction of the stated violation. In addition, the Bank shall 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 Bank shall revise, adopt, and implement a written liquidity and funds management policy. Such policy should address and incorporate the recommendations set forth on page(s) 27–28 of the Report of Examination as of October 25, 1999. Such implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.
   (b) During the life of this ORDER, the Bank shall maintain a minimum liquidity ratio of 4%. For the purposes of this ORDER, the term liquidity ratio is defined as the sum of net cash, short term, and marketable assets divided by the sum of net deposits and short term liabilities.

   [.12]12. Within 10 days after eliminating from its books any asset in compliance with Paragraph 4 of this ORDER, the Bank shall file with the FDIC amended Consolidated Reports of Condition and Income which shall accurately reflect the financial condition of the Bank as of September 30, 1999. Thereafter, during the life of this ORDER, the Bank shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the end of the period for which the Reports are filed, including any adjustment in the Bank's books made necessary or appropriate as a consequence of any California Department of Financial Institutions or FDIC examination of the Bank during that reporting period.

   [.13]13. Within 60 days from the effective date of this ORDER, the Bank shall prohibit the payment of any management, consulting, or other fees or funds of any nature, directly or indirectly, to or for the benefit of the Bank's holding company to only those fees or funds paid in connection with services performed by the Bank's holding company on behalf of or for the benefit of the Bank, and only with the prior written consent of the Regional Director.

   [.14]14. During the life of this ORDER, the Bank shall not pay cash dividends without the prior written consent of the Regional Director.

   [.15]15. During the life of this ORDER, the Bank shall not authorize, approve, accrue, or pay any bonuses without the prior approval of the Regional Director.

   [.16]16. During the life of this ORDER, the Bank shall give written notice to the Regional Director at such time as the Bank intends to make use of brokered deposits. The notification should indicate how the brokered deposits are to be utilized with specific reference to credit quality of investments/loans and the effect on the Bank's funds position and asset/liability matching. The Regional Director shall have the right to reject the Bank's plans for utilizing brokered deposits. For purposes of this ORDER, brokered deposits are defined as described in section 337.6(a)(1) of the FDIC Rules and Regulations to include any deposits funded by third party agents or nominees for depositors, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or asserts a right to federal deposit insurance.

   [.17]17. Following the effective date of this ORDER, the Bank shall send to its shareholder(s) or otherwise furnish a description of this ORDER in conjunction with the Bank's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Bank'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.
   18. Periodically, the Bank 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. Initially, such reports shall be made on the fifteenth day of the month following the effective date of this ORDER, and on the fifteenth day of every month thereafter, until such frequency {{6-30-00 p.C-4910}}is amended in writing by the Regional Director. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank 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 20th day of March, 2000.



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