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FDIC Enforcement Decisions and Orders

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   [10,018] In the Matter of Alvarado Bank, Richmond, California, Docket No. FDIC-89-180b (11-2-89).

   Bank to cease and desist from practices such as hazardous lending and lax collection policies and operating with inadequate equity capital and reserves in relation to the volume and quality of assets, with a large volume of poor quality loans, with inadequate loan valuation reserve, with inadequate internal routine and controls, and in such a manner as to produce low earnings; and violating applicable federal and state law. (This order was terminated by order of the FDIC dated 7-23-92; see ¶ 15,487.)

   [.1] Management—Qualifications—Compliance
   [.2] Primary Capital—Increase—Methods
   [.3] Assets—Adversely Classified—Reduce
   [.4] Loans—Extensions of Credit
   [.5] Loan Policy—Revisions—Review
   [.6] Loans—Indirect Auto Loans—Reduce
   [.7] Loan Loss Reserve—Adequacy and Review
   [.8] Strategic Plan—Minimum Requirements
   [.9] Violations of Law—Eliminate and/or Correct—Compliance
   [.10] Liquidity and Funds Management—Written Policy—Review
   [.11] Bank Operations—Written Policy—Review
   [.12] Financial Condition—Amendment—Filing
   [.13] Shareholders—Dividends—Approval
   [.14] Brokered Deposits—Report—Review
   [.15] Shareholders—Disclosure—Cease and Desist Order
   [.16] Real Estate Activities—State Law—Approval
   [.17] Compliance—Progress Reports—Frequency

In the Matter of

ALVARADO BANK
RICHMOND, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   The Federal Deposit Insurance Corporation ("FDIC"), on September 15, 1989 issued to Alvarado Bank, Richmond, California ("Bank"), a NOTICE OF CHARGES AND OF HEARING ("NOTICE"), pursuant to section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1). The Notice charges the Bank with having engaged in unsafe or unsound banking practices and committing violations of law and/or regulations.
   The bank and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN OR- {{9-30-92 p.C-88}}DER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated November 2, 1989, whereby, solely for the purpose of this proceeding and without admitting or denying the allegations in the NOTICE, the Bank 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 Bank 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:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of affairs of the Bank, cease and desist from the following unsafe or unsound banking practices and violations:
   (a) following hazardous lending and lax collection practices;
   (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 loan valuation reserve;
   (e) operating with inadequate provisions for liquidity and funds management;
   (f) operating with inadequate internal routine and controls policies;
   (g) operating in such a manner as to produce low earnings; and
   (h) operating in violation of section 22(h) of the Federal Reserve Act, as amended, 12 U.S.C. § 375b, as more fully described on page 6-a of the Report of Examination as of June 30, 1989; section 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(b), made applicable to state nonmember banks by section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2), as more fully described on page 6-1 of the Report of Examination as of June 30, 1989; Sections 1200, 1201, and 1221 of the California Financial Code, as more fully described on pages 6-a and 6-a-1 of the Report of Examination as of June 30, 1989.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. (a) The Bank shall employ and thereafter retain qualified management. At a minimum and within 120 days of the effective date of this Order, the Bank shall employ a chief executive officer with proven ability in managing a bank of comparable size and experience in upgrading a low quality loan portfolio and a senior lending officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Bank's loans. Such persons shall be provided the necessary written authority to implement the provisions of this ORDER. 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, and liquidity.
   (b) During the life of this ORDER, the Bank shall notify the Regional Director of the San Francisco Regional Office ("Regional Director") and the Superintendent of Banks of the California State Banking Department ("Superintendent") in writing of any contemplated changes in management which notification must include the names and background of any replacement personnel. The notification must be received at least 30 days before such change is effective. The Regional Director or Superintendent at any time before the expiration of the 30 days may issue a notice of disapproval of the proposed change.

   [.2] 2. (a) Within 270 days from the effective date of this ORDER, the Bank shall increase primary capital by no less than $2,000,000, and shall have adjusted primary capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Bank's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Bank shall maintain adjusted primary capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Bank's adjusted Part 325
{{4-1-90 p.C-89}}total assets. Primary capital and Part 325 total assets shall be calculated in accordance with prevailing instructions for the preparation of Reports of Condition. The computation of adjusted primary capital and the ratio of adjusted primary capital to adjusted Part 325 total assets shall be determined by using the procedures outlined in the "Analysis of Capital and Reserves" schedule in the FDIC Report of Examination.
   (b) Any increase in primary 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 perpetual preferred stock; or
       (iii) the direct contribution of cash by the board of directors and/or shareholders of the Bank; or
       (iv) the collection of assets previously charged off; or
       (v) the reduction of the "Loss" assets specified in Paragraph 3 of this ORDER without loss or liability to the Bank; or
       (vi) any other means acceptable to the Regional Director and the Superintendent; or
       (vii) any combination of the above means.
   (c) If all or part of the increase in primary 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 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 Unit, 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 primary capital is provided by the sale of 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 Superintendent for prior approval.
   (d) In complying with the provisions of Paragraph 2 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.
   (e) For the purposes of this ORDER, the terms "primary capital" and "total assets" shall have the meaning ascribed to them in Part 325 of the FDIC Rules and Regulations, respectively subsections 325.2(h) and 325.2(k) (12 C.F.R. §§ 325.2(h) and 325.2(k)).
   [.3] 3. (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 June 30, 1989, 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) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of June 30, 1989 that have not previously been charged off to not more than $1,750,000.
   (c) Within 270 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of June 30, 1989 that have not previously
{{4-1-90 p.C-90}}been charged off to not more than $1,530,000.
   (d) The requirements of subparagraphs 3(a), 3(b), and 3(c) 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 3(b), 3(c), and 3(d) 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.

   [.4] 4. (a) Beginning with the effective date of this ORDER, the Bank 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 Bank that has been charged off or classified, in whole or in part, "Loss" and is uncollected. Subparagraph 4(a) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with the Financial Accounting Standards Board Statement Number 15 ("FASB 15").
   (b) Beginning with the effective date of this ORDER, the Bank 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 Bank that has been classified, in whole or part, "Substandard" without the prior approval of a majority of the board of directors or the loan committee of the Bank. Subparagraph 4(b) of this ORDER shall not prohibit the Bank 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 Bank.
   (c) In connection with subparagraph 4(a) and 4(b) of this ORDER, the Bank 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 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.
   (d) For the purpose of subparagraph 4(c) 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.

   [.5] 5. 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 function. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.6] 6. Within 60 days from the effective date of this ORDER, the Bank shall submit a plan subject to approval by the Regional Director and the Superintendent to reduce the concentration of indirect auto loans as specified on Page 2-b of the Report of Examination as of June 30, 1989. In addition, the Bank shall not make new extensions of credit in the form of indirect auto loans.

   [.7] 7. Prior to October 31, 1989, the Bank shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve 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 reserve for loan losses prior to the end of each quarter. The
{{4-1-90 p.C-91}}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 reserve, and the basis for determination of the amount of the reserve provided.

   [.8] 8. Within 90 days from the effective date of this ORDER, the Bank shall formulate and implement a written strategic plan ("strategic plan"). The strategic plan shall be forwarded to the Regional Director and to the Superintendent for review and comment and shall address, at a minimum, the following:
   (a) the common goal and/or strategy for the Bank including:

       (i) the line or lines of business the Bank will pursue;
       (ii) an identification of the personnel, computer support and accounting controls necessary for each line of business; and
       (iii) an identification and analysis of the risks and costs versus benefits and potential of each line of business.
   (b) goals and strategies for improving and sustaining the earnings of the Bank, including:
       (i) an identification of the major areas in, and means by which, the board of directors will seek to improve the Bank's operating performance:
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (c) coordination of the Bank's loan investment, and operating policies, and budget and profit planning, with the funds management policy:
   (d) during the life of this ORDER, the board of directors shall annually review the strategic plan at a board meeting at which all directors are in attendance. Any changes in the Bank's goals or strategies shall be reflected in a modification of the strategic plan. Any modifications to the Bank's strategic plan shall be submitted to the Regional Director and the Superintendent for review and comment.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct to the extent legally permissible all violations of law which are more fully set out on pages 6-a and 6-a-1 of the Report of Examination of the Bank as of June 30, 1989. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.
   [.10] 10. Within 60 days from the effective date of this ORDER, the Bank 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 Superintendent as determined at subsequent examinations and/or visitations.

   [.11] 11. Within 120 days from the effective date of this ORDER, the Bank shall adopt and implement a policy for the operation of the Bank in such a manner as to provide internal routine and controls consistent with safe and sound banking practices. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.12] 12. Within 30 days after eliminating from its books any asset in compliance with Paragraph 3 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 December 31, 1988, March 31, 1989 and June 30, 1989. 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 as prepared for FDIC reporting purposes made necessary or appropriate as a consequence of any FDIC examination of the Bank during that reporting period.

   [.13] 13. The Bank shall not pay cash dividends on common stock in any amount except as follows:
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   (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 primary capital to total assets of the Bank will be not less than seven and one-half (7.5) 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 Superintendent, which approval shall not be unreasonably withheld.

   [.14] 14. While this ORDER is in effect, the Bank shall give written notice to the Regional Director and the Superintendent 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 and the Superintendent shall have the right to reject the Bank's plans for utilizing brokered deposits.

   [.15] 15. Following the effective date of this ORDER, the Bank shall send to its shareholders 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 Unit, 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.

   [.16] 16. During the life of this ORDER, the Bank shall furnish to the Regional Director a copy of any application to the Superintendent filed pursuant to section 751.3 of the California Financial Code (section 751.3 CAL. FIN. CODE) to engage in real estate activities. This copy of such application shall be furnished to the Regional Director on or before the date of its filing with the Superintendent. In no event shall the Bank engage in real estate activities which are the subject of any such application filed pursuant to section 751.3 of the California Financial Code without the prior written consent of the Regional Director.

   [.17] 17. 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 Bank shall furnish written progress reports to the Regional Director and the Superintendent 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 Bank's Report of Condition and the Bank'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 Superintendent have released the Bank in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank.
   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 2nd day of November, 1989.

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