Federal Deposit
Insurance Corporation

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   [¶10,731] In the Matter of First Fidelity Thrift and Loan, San Diego, California, Docket No. FDIC-93-41b (2-26-93).

   Thrift to cease and desist from such unsafe or unsound practices as failing to provide adequate supervision over the Bank's affairs; operating with inadequate management; operating with inadequate capital; operating with an excessive level of poor quality assets; operating without adequate reserve for loan losses; operating with an inadequate loan policy; following hazardous lending practices; operating with inadequate policies governing institution's relationship with inadequate policies governing institution's relationship with its holding company; operating with inadequate provisions for liquidity and funds management; operating without proper internal routine and controls; and operating with undue concentrations of credit. (Editor's Note: This order was terminated by order of the FDIC dated 11-22-96. See ¶16,134.)

   [.1] Board of Directors—Responsibilities Described
   [.2] Management—Qualifications—Review
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Assets—Adversely Classified—ELiminate/Reduce
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Collateral—Payment of Taxes and Insurance—Prior Approval Required
   [.7] Loan Policy—Written Revision—Minimum Requirements
   [.8] Loans—Concentrations of Credit—Risk Segmentation Analysis
   [.9] Loan Loss Reserve—Establish/Maintain
   [.10] Budget and Earnings Plan—Preparation Required
   [.11] Strategic Plan—Preparation Required
   [.12] Violations of Law—Eliminate/Correct
   [.13] Liquidity and Funds Management—Policy Required
   [.14] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.15] Holding Company—Relations With—Written Policy
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   [.16] Dividends—Restricted
   [.17] Compensation—Written Review Required
   [.18] Reports of Condition and Income—Amendment Required
   [.19] Shareholders—Disclosure—Cease and Desist Order
In the Matter of

FIRST FIDELITY THRIFT AND
LOAN
SAN DIEGO, CALIFORNIA
(Insured State Nonmember Bank)
ORDER
TO
CEASE AND DESIST
FDIC-93-41b
   First Fidelity Thrift and Loan, San Diego, California ("Insured Institution"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Insured 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 counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated February 23, 1993, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and/or regulations, the Insured 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 Insured institution had engaged in unsafe or unsound banking practices and had committed violations of law and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS HEREBY ORDERED that the Insured Institution, 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 and violations:
   (a) operating with inadequate supervision by the board of directors;
   (b) operating with inadequate management;
   (c) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Insured institution;
   (d) operating with a large volume of poor quality assets;
   (e) operating with an inadequate loan valuation reserve methodology;
   (f) operating with inadequate lending policies;
   (g) following hazardous lending practices;
   (h) operating with inadequate policies governing the relationship between the Insured institution and its holding company;
   (i) operating with inadequate provisions for liquidity and funds management;
   (j) operating with inadequate routine and controls policies;
   (k) operating with undue concentrations of credit in relation to the Insured Institution's capital account; and
   (l) operating in violation of Part 323 of the FDIC Rules and Regulations, 12 C.F.R. § 323, as more fully described on pages 6-b and 6-b-1 of the Report of Examination as of September 28, 1992; Part 349 of the FDIC Rules and Regulations, 12 C.F.R. § 349, as more fully described on page 6-b-1 of the Report of Examination as of September 28, 1992; and section 215.8 of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.8, made applicable to state nonmember institutions by section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2), as more fully described on page 6-b-1 of the Report of Examination as of September 28, 1992; and sections 1141(b) and 1154 of the California Code of Regulations, as more fully described on pages 6-b and 6-b-1 of the Report of Examination as of September 28, 1992.
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   IT IS FURTHER ORDERED that the Insured Institution take affirmative action as follows:

   [.1] 1. Within 30 days from the effective date of this ORDER, the board of directors shall increase its participation in the affairs of the Insured Institution, assuming full responsibility for the formulation of sound policies and objectives, the monitoring of compliance with established policies, and the supervision of all of the Insured Institution's activities.
   This participation shall include meetings to be held no less frequently than monthly at, which, at a minimum, the following areas where appropriate and timely shall be reviewed and approved: reports of income and expenses; new, overdue, renewal, insider, 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.

   [.2] 2. The Insured Institution 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 Insured Institution. Management should include a chief executive officer with proven ability in managing a Insured Institution of comparable size, and experience in upgrading a low quality loan portfolio, improving earnings, and other matters needed particular attention. Management should also include a senior lending officer with significant appropriate lending, collection, and loan supervision experience and experience in upgrading a low quality loan portfolio. Each member of management shall be provided appropriate written authority from the Insured 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 with Insured Institution in a safe and sound manner;
   (iii) comply with applicable laws and regulations; and
   (iv) restore all aspects of the Insured 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 Insured Institution shall notify the Regional Director and the FDIC's San Francisco Regional Office ("Regional Director") and the Commissioner of Corporations for the State of California ("Commissioner") in writing when it proposes to add any individual to the Insured 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 Insured Institution 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 90 days from the effective date of this ORDER, the Insured Institution shall have Tier 1 capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Insured Institution's total assets. Thereafter, during the life of this ORDER, the Insured Institution shall maintain Tier 1 capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Insured Institution's total assets.
   (b) Within 60 days from the effective date of this ORDER, the Insured Institution shall develop and adopt a plan to 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 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 loan loss reserve, the adequacy of which shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.
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   (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; 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 Insured Institution's loan loss reserves.
   (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 InsuredInstitution's securities (including a distribution limited only to the Insured Institution's existing shareholders), the Insured Institution shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the insured 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 and the Commissioner for prior approval.
   (f) In complying with the provisions of Paragraph 3 of this ORDER, the Insured Institution shall provide to any subscriber and/or purchaser of the Insured 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 Insured 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 Insured Institution's securities who received or was tendered the information contained in the Insured Institution'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 to 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.

[.4] 4. (a) Within 10 days from the effective date of this ORDER, the Insured Institution shall eliminate from its books. by charge-off or collection, all assets classified "Loss" and one-hall of the assets classified "Doubtful" as of September 28, 1992, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Insured Institution is not considered collection for the purpose of this paragraph.
   (b) By no later than June 30, 1993, the Insured Institution shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of September 28, 1992 that have not previously been charged off to not more than $60,000,000.
   (c) By no later than September 30, 1993, the Insured Institution shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of {{4-30-93 p.C-3066}}September 28, 1992 that have not previously been charged off to not more than $50,000,000.
   (d) By no later than December 31 , 1993, the Insured Institution shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of September 28, 1992 that have not previously been charged off to not more than $40,000,000.
   (e) By no later tan March 31, 1994, the Insured Institution shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of September 28, 1992 that have not previously been charged off to not more than $30,000,000.
   (f) The requirements of subparagraph 4(a), 4(b), 4(c), 4(d, and 4(e) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Insured Institution shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Insured Institution 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.

   6. Beginning with the effective date of this ORDER, the Insured Institution 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 Insured Institution that has been classified, in whole or part, "Substandard" or "Doubtful" without the prior approval of a majority of the board of directors or the loan committee of the Insured Institution. Paragraph 6 of this ORDER shall not prohibit the Insured Institution from renewing or extending the maturity of any credit in accordance with FASB 15, providing that such renewal or extension shall be made only with the prior approval of a majority of the board of directors or the loan committee of the Insured Institution.

   (a) In connection with Paragraph 5 and 6 of this ORDER, the Insured Institution shall not:

   (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 Insured Institution. 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.

   (b) For the purpose of subparagraph 6(a) of this ORDER, debt is "well secured" if it is secured by:

   (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.

A debt is "in the process of collection" if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status.

[.6] 7. (a) The payment by the Insured Institution of real property taxes and insurance premiums in connection with real property security may be made to protect the Insured Institution's real property collateral value with prior approval by the {{4-30-93 p.C-3067}}President or a majority of the loan committee.
   (b) Paragraph 5 and Paragraph 6 shall not apply to the advance of funds by the Insured Institution for the sole purpose of maintaining or protecting its real estate collateral or position in such collateral for real estate-secured extensions of credit if, prior to extending such additional credit pursuant to said paragraphs, such additional credit shall be approved by the President and a majority of the loan committee of the Insured Institution who shall certify, in writing.

   (i) why the failure to extend such credit would be detrimental to the best interests of the Insured Institution;
   (ii) that the Insured Institution's position would be improved thereby; and
   (iii) how the Insured Institution's position would be improved.

   (a) The initial revisions to the Insured Institution'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 loan 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 Insured Institution;
   (iii) provisions which require complete loan documentation, realistic repayment terms and current credit infermation 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 where available 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 that directors determine that the lending staff has the expertise necessary to properly supervise construction loans and that adequate procedures are in place to monitor any construction involved before funds are disbursed;
   (ix) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $50,000 which are classified "Substandard" and "Doubtful" as of September 28, 1992 or by the FDIC or California Department of Corporations in subsequent Reports of Examination and all other loans in excess of $50,000 which warrant 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 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 {{4-30-93 p.C-3068}}all members are present and the vote of each is noted.

   [.9] 10. The Insured Institution shall maintain an adequate reserve for loan losses.
   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 setting forth a specific methodology for determining the adequacy of the reserve for loan losses. For the purpose of this determinations, 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 prior to the filing date for each Report of Condition and Income, 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 Insured Institution'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 Insured Institution shall increase and maintain its loss reserve consistent with the loan loss reserve policy established. Such policy and its implementation shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

[.10] 11. (a) Within 60 days from the effective date of this ORDER, the Insured Institution shall formulate and fully implement a written 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 and sustain earnings of the Insured Institution. 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 Insured Institution shall formulate such a plan and budget by November 30 of each subsequent year.
   (b) The plan and budget required by subparagraph Il(a) of this ORDER, upon completion, shall be submitted to the Regional Director and Commissioner for their review and opportunity for comment.
   (c) Following the end of each calendar quarter, the board of directors shall evaluate the Insured Institution'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 Insured Institution, in the minutes of the board of directors meeting at which such evaluation is undertaken.

   [.12] 13. Within 360 days from the effective date of this ORDER, the Insured Institution shall eliminate and/or correct all violations of law which are more fully set out on pages 6-b through 6-b-1 of the Report of Examination of the Insured Institution as {{1-31-96 p.C-3069}}of September 28, 1992. In addition, the Insured Institution shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.13] 14. Within 60 days from the effective date of this ORDER, the Insured Institution shall develop or revise, adopt, and implement a written liquidity and funds management policy. 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.

[.14] 15. (a) Within 90 days from the effective date of this ORDER, the Insured Institution shall adopt and implement a policy for the operation of the Insured Institution 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 6-c of the Report of Examination of the Insured Institution as of September 28, 1992 and shall provide procedures so that the Insured Institution 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 Insured Institution shall develop an internal audit program that establishes procedure to protect the integrity of the Insured Institution'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.

   [.16] 17. The Insured Institution shall not pay cash dividends without the prior written consent of the Regional Director and the Commissioner.

   [.17] 18. Within 120 days from the effective date of this ORDER, the Insured Institution shall adopt an employee compensation plan after undertaking a review of compensation paid to any of the Insured Institution's executive officers. At a minimum, the review shall include the following:

   (a) a critical analysis of each individual's background, experience, dudes and responsibilities, and an appraisal of each individual's performance compared to the present level of compensation;
   (b) a comparison of each officer's total compensation with compensation received by officers with similar responsibilities in similar institutions; and
   (c) a determination of whether present executive officers are capable of implementing board directives and policies, operating within the constraints of laws and regulations, and operating the Insured Institution in a prudent manner.
For the purposes of this paragraph, "compensation" refers to any and all salaries, bonuses, and other benefits of every kind and nature whatsoever, whether paid directly or indirectly. The compensation plan and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.19] 20. Following the effective date of this ORDER, the Insured Institution shall {{1-31-96 p.C-3070}}send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Insured Institution's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Insured 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.

   21. Within 30 days of June 30, 1993, and within thirty (30) days of the end of each quarter thereafter, the Insured Institution 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 Insured Institution's Report of Condition and the Insured Institution'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 Insured Institution in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Insured Institution, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Insured Institution.
   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 26th day of February, 1993.
   Pursuant to delegated authority.