{{9-30-92 p.C-1836}}
[¶10,421] In the Matter of North American Thrift and Loan Association, Corona Del Mar, California, Docket No. FDIC-92-10b (1-21-92).
Institution to cease and desist from such unsafe or unsound practices as operating with inadequate management; following hazardous lending and lax collection practices; operating with inadequate capital; operating with a large volume of poor quality loans; following hazardous lending and lax collection practices; operating with inadequate liquidity; and operating in such a manner as to produce operating losses. (This order was terminated by order of the FDIC dated 7-24-92; see ¶ 15,489.)
[.1] Management—Qualifications—Review
[.2] Capital—Core Capital—Increase/Maintain—Methods
[.3] Assets—Adversely Classified—Eliminate/Reduce
[.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
[.5] Loan Loss Reserve—Establish/Maintain
[.6] Mortgage Servicing Rights—Analysis Required
[.7] Strategic Plan—Preparation Required
[.8] Lending and Collection Policy—Minimum Requirements
[.9] Loans—Concentrations of Credit—Reduction Plan
[.10] Asset/Liability Management—Written Policy—Minimum Requirements
[.11] Profit Plan—Minimum Requirements
[.12] Compensation Plan—Review Required
[.13] Dividends—Restricted
[.14] Bank Operations—Internal Routine and Controls—Written Policy Required
[.15] Shareholders—Disclosure—Cease and Desist Order
[.16] Compliance Reports—Frequency
{{3-31-92 p.C-1837}}
In the Matter of
NORTH AMERICAN THRIFT AND
LOAN ASSOCIATION
CORONA DEL MAR, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO
CEASE AND DESIST
FDIC-92-10b
North American Thrift and Loan Association, Corona Del Mar, California, ("Thrift and Loan"), 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 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"), dated January 13, 1992, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, the Thrift 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 Thrift and Loan had engaged in unsafe or unsound baking practices. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED that the Thrift and Loan, and any institution-affiliated party as such term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices:
(a) operating with inadequate management;
(b) operating with a hazardous level of concentrations in relation to the Thrift and Loan's capital account;
(c) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Thrift and Loan;
(d) operating with a large volume of poor quality loans;
(e) following hazardous lending and lax collection practices;
(f) operating with inadequate provisions for liquidity and funds management; and
(g) operating in such a manner as to produce operating losses; and
IT IS FURTHER ORDERED that the Thrift and Loan take affirmative action as follows:
[.1] 1. The Thrift and Loan 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 and Loan. Management should include a chief executive officer with proven ability in managing a Thrift and Loan of comparable size, and experience in upgrading a low quality loan portfolio, improving earnings, and other matters needing particular attention. Management should also include a senior lending officer with significant appropriate lending, collection, and loan supervision experience and experience upgrading a low quality loan portfolio. Each member of management shall be provided appropriate written authority from the Thrift and Loan'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 and Loan in a safe and sound manner;
(iii) comply with applicable laws and regulations; and
(iv) restore all aspects of the Thrift and Loan to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.
(c) During the life of this ORDER, the Thrift and Loan shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the California Department of Corporations ("Commissioner") in writing when it proposes to add any individual to the Thrift and Loan's board of directors or employ any individual as a senior execu-
{{3-31-92 p.C-1838}}tive 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 and Loan 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. § 18311.
[.2] 2. (a) Within 120 days from the effective date of this ORDER, the Thrift and Loan shall have core capital of no less than $1,250,000. Within 180 days from the effective date of this ORDER, the Thrift and Loan shall have core capital of no less than $1,600,000, and have core capital in such an amount as to equal or exceed six (6.0) percent of the Thrift and Loan's total assets. Thereafter, during the life of this ORDER, the Thrift and Loan shall maintain core capital in such an amount as to equal or exceed six (6.0) percent of the Thrift and Loan's total assets.
(b) Within 60 days from the effective date of this ORDER, the Thrift and Loan shall develop and adopt a plan to meet 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 as determined at subsequent examinations or visitations.
(c) Any increase in core 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 non-cumulative 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 and the Commissioner.
(d) If all or part of the increase in core 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 Thrift and Loan's securities (including a distribution limited only to the Thrift and Loan's existing shareholders), the Thrift and Loan shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Thrift and Loan 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 Unit, Washington, D.C. 24029, 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 core capital is provided by the sale of non-cumulative 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 and the Commissioner for prior approval.
(e) In complying with the provisions of Paragraph 2 of this ORDER, the Thrift and Loan shall provide to any subscriber and/or purchaser of the Thrift and Loan'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 and Loan 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 and Loan's securities who received or was tendered the information contained in the Thrift and Loan's original offering materials.
(f) For the purposes of this ORDER,
{{3-31-92 p.C-1839}}the terms "core 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(m) and 325.2(n) as amended at 56 Fed Reg. 10154, effective April 10, 1991.
[.3] 3. (a) Within 10 days from the effective date of this ORDER, the Thrift and Loan shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of April 16, 1991, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Thrift and Loan is not considered collection for the purpose of this paragraph.
(b) Within 120 days from the effective date of this ORDER, the Thrift and Loan shall have reduced the assets (excluding those certain classified assets categorized as excess mortgage service fee receivables) classified "Substandard" as of April 16, 1991 that have not previously been charged off to not more than $300,000.
(c) The requirements of subparagraphs 3(a), and 3(b), of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Thrift and Loan shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Thrift and Loan is not considered collection for the purpose of this paragraph. As used in subparagraphs 3(b) and 3(c) 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
(iv) any other means acceptable to the Regional Director and the Commissioner.
[.4] 4. Following the effective date of this ORDER, the Thrift and Loan shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Loss" or "Substandard" and is uncollected unless the board of directors has signed a detailed written statement giving reasons why failure to extend such credit would be detrimental to the best interests of the Thrift and Loan. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.
[.5] 5. (a) Within 10 days from the effective date of this ORDER, the Thrift and Loan shall establish and thereafter maintain an adequate reserve for loan losses.
(b) Additionally, 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 reserve for loan losses. For the purpose of this determination, the adequacy of the reserve shall be determined after the charge-off of all loans or other items classified "Loss." The policy shall provide for a review of the reserve 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 loss reserve may be properly reported in the quarterly Reports of Condition and Income. The review should focus on the results of the Thrift and Loan's internal loan review, loan 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 reserve 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 Thrift and Loan shall increase and maintain its loan loss reserve consistent with the reserve for loan loss policy. Such policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
[.6] 6. (a) Within 45 days from the effective date of this Order, the Thrift and Loan shall prepare a report which analyzes the value of the excess mortgage service fee receivable.
(b) Upon completion of the report the Thrift and Loan shall immediately submit to the Regional Director and the Commis-
{{3-31-92 p.C-1840}}sioner a written copy of the report and all pertinent assumptions. The Thrift's outside accountants shall review the report and provide a written statement as to whether the assumptions utilized should be modified. The analysis of the value of the excess service fee receivables shall be acceptable to the Regional Director and Commissioner.
(c) Within 15 days of the completion of the report, the Thrift and Loan shall draft a schedule of amortization with regard to the excess mortgage service fee receivables on the Thrift and Loan's books. The amortization schedule shall be acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
(d) At least once each calendar quarter the Thrift and Loan shall provide for an updated analysis of the value of the excess mortgage service fee receivable and, if necessary, adjust the amortization schedule of the receivables. The analysis should be completed at least 30 days after the end of each quarter and any adjustments to the book value or amortization schedule of the receivables made necessary as a result of the update should be made prior to submitting the Reports of Condition and Income. The updated analysis and amortization schedules shall be 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 Thrift and Loan shall prepare and submit to the Regional Director and the Commissioner a written business/ strategic plan covering the overall operation of the Thrift and Loan. Such plan shall be acceptable to the Regional Director and the Commissioner.
[.8] 8. (a) Within 60 days from the effective date of this ORDER, the Thrift and Loan shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Thrift and Loan's lending function, which policies shall include specific guidelines for placing loans on a non-accrual basis. In addition, the Thrift and Loan shall obtain adequate and current documentation for all loans in the Thrift and Loan's loan portfolio. 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.
(b) The initial revisions to the Thrift and Loan's loan policy and practices, required by this paragraph, at a minimum, shall include the following:
(i) 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 delinquent loans;
(ii) provisions which prohibit the capitalization of interest or loans related expense unless the board of directors supports in writing and records in the minutes of the corresponding board of directors meeting why an exception thereto is in the best interests of the Thrift and Loan;
(iii) provisions which require complete loans documentation, realistic repayment terms and current credit information adequate to support the outstanding indebtedness of the borrower. Such documentation shall include current financial information, profit and loss statements or copies of tax returns and cash flow projections;
(iv) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values.
(v) provisions which specify the circumstances and conditions under which real estate appraisals must be conducted by an independent third party;
(vi) provisions which establish standards for unsecured credit;
(vii) provisions which establish officer lending limits:
(viii) provisions which prohibit concentrations of credit in excess of 25 percent of the Thrift and Loan's total equity capital and reserves to any borrower and that borrower's related interest;
(ix) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans which are classified "Substandard" as of April 16, 1991 or by the FDIC or California Department of Corporations in subsequent Reports of Examination and all other loans which war-
{{3-31-92 p.C-1841}}rant 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; and
(x) the board of directors shall adopt procedures whereby officer compliance with the revised loans 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.
[.9] 9. Within 60 days from the effective date of this ORDER, the Thrift and Loan shall submit a written plan, approved by its board of directors and acceptable to the Regional Director and the Commissioner for systematically reducing the concentrations of credit as listed on page 2-b in the Report of Examination.
[.10] 10. Within 60 days from the effective date of this ORDER, the board of directors shall develop a comprehensive asset/ liability management policy acceptable to Regional Director and Commissioner. The policy shall establish standards consistent with generally accepted prudent banking operations by giving specific consideration to:
(i) establishing a range for the Thrift and Loan's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination, and which ratio shall, within 180 days from the effective date of this ORDER, be reduced to not more than twenty-five (25.0) percent; and within 360 days from the effective date of this ORDER, be reduced to not more than fifteen (15.0) percent. The requirements of this paragraph shall not be construed as standards for future operations, and the Thrift and Loan's volatile liability dependency ratio shall be maintained at a level consistent with prudent banking practices;
(ii) establishing a range for short-term investments to potentially volatile liabilities, as those terms are defined by the FDIC in its current edition of "A Users Guide for the Uniform Bank Performance Report";
(iii) establishing maturity ranges for the Thrift and Loan's investment portfolio;
(iv) establishing acceptable ranges for the Thrift and Loan's rate sensitivity and gap ratios; and
(v) the establishing of an asset/ liability committee, including a description of its responsibilities, how often it will meet, how it will obtain information and guidance from the board of directors, and how its activities will be reported to the board of directors.
[.11] 11. (a) Within 60 days from the effective date of this ORDER, the Thrift and Loan shall formulate and fully implement a written profit plan and a comprehensive budget for all categories of income and expense. The plan and budget required by this paragraph shall include formal goals and strategies, consistent with sound banking practices, to improve the Thrift and Loan's net interest margin, increase interest income, reduce discretionary expenses, and improve and sustain earnings of the Thrift and Loan. The plan shall include a description of the operating assumptions that form the basis for and adequately support, major projected income and expense components. Thereafter, the Thrift and Loan shall formulate such a plan and budget by November 30 of each subsequent year.
(b) The plan and budget required by subparagraph 12(a) of this ORDER, shall be in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.
(c) Following the end of each calendar quarter, the board of directors shall evaluate the Thrift and Loan's actual performance in relation to the plan and budget required by subparagraph 11(a) of this ORDER and shall record the results of the evaluation, and any actions taken by the Thrift and Loan, in the minutes of the board of directors meeting at which such evaluation is undertaken.
[.12] 12. Within 60 days from the effective date of this ORDER, the Thrift and Loan shall adopt an employee compensation plan after undertaking a review of compensation paid to all members of the Thrift and Loan's board of directors and senior management
{{3-31-92 p.C-1842}}team. At a minimum the review shall include the following:
(a) a critical analysis of each individual's background, experience, duties and responsibilities, and an appraisal of each individual's performance compared to the present level of compensation;
(b) a comparison of each individual's total compensation with compensation received by officials with similar responsibilities in similar institutions;
(c) a determination of whether present members of senior management are capable of implementing board directives and policies, operating the Thrift and Loan in a prudent manner. For the purpose of this paragraph, "compensation" refers to any and all salaries, bonuses, retirement annuities, and other benefits of every kind and nature whatsoever, whether paid directly and indirectly. The compensation plan and its implementation shall be in the form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/ or visitations.
[.13] 13. The Thrift and Loan shall not pay cash dividends in any amount except as follows:
(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 core capital to total assets of the Thrift and Loan will be not less than six (6.0) percent;
(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.
[.14] 14. Within 60 days from the effective date of this ORDER, the Thrift and Loan shall adopt and implement a policy for the operation of the Thrift and Loan in such a manner as to provide adequate internal routine and control policies consistent with safe and sound banking practices. Such policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
[.15] 15. Following the effective date of this ORDER, the Thrift and Loan shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Thrift and Loan's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Thrift and Loan's next shareholder meeting. The description shall fully describe the ORDER in all materials respects.
[.16] 16. 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 and Loan 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 and Loan's Report of Condition and the Thrift and Loan'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 and Loan in writing from making further reports.
The provisions of this ORDER shall be binding upon the Thrift and Loan, its directors, officers, employees, agents, successors, assigns, and any institution-affiliated parties of the Thrift and Loan.
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 21st day of January, 1992.
Pursuant to delegated authority.
