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FDIC Enforcement Decisions and Orders

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   [10,037] In the Matter of Desert Community Bank, Victorville, California, Docket No. FDIC-89-244b (12-29-89).

   Bank to cease and desist from practices such as following hazardous lending and lax collection practices and operating with inadequate equity capital and reserves relative to the volume and quality of assets, with a large volume of poor quality assets, with an inadequate loan valuation reserve, in a manner as to produce low earnings, and in violation of federal rules and regulations. (This order was terminated by order of the FDIC, dated 4-5-91: see ¶ 15.253)

   [.1] Management—Qualifications—Compliance
   [.2] Management—Management Plan—Minimum Requirements
   [.3] Primary Capital—Increase—Methods
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   [.4] Assets—Adversely Classified—Reduce
   [.5] Loans—Extensions of Credit—Curtail—Exception
   [.6] Definition—"Well Secured Debt"
   [.7] Loan Policy—Minimum Requirements—Review
   [.8] Loan Loss Reserve—Adequacy—Review
   [.9] Shareholders—Dividends—Approval
   [.10] Profit Plan—Minimum Requirements—Review
   [.11] Violations of Law—Eliminate/Correct
   [.12] Shareholders—Disclosure—Cease and Desist Order
   [.13] Compliance—Progress Reports—Frequency

In the Matter of

DESERT COMMUNITY BANK
VICTORVILLE, CALIFORNIA

(Insured State Nonmember Depository
Institution)
ORDER TO CEASE AND DESIST

   Desert Community Bank, Victorville, California ("Insured Institution"), 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 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 December 14, 1989, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, 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. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Insured Institution, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of affairs of the Insured Institution, cease and desist from the following unsafe or unsound banking practices:
   (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 Insured Institution;
   (c) operating with a large volume of poor quality assets;
   (d) operating with an inadequate loan valuation reserve;
   (e) operating in such a manner as to produce low earnings; and
   (f) operating in violation of sections 326.2, 326.4 and 337.2(d) of the FDIC Rules and Regulations, 12 C.F.R. §§ 326.2, 326.4 and 337.2(d).
   IT IS FURTHER ORDERED that the Insured Institution take affirmative action as follows:

   [.1] 1. (a) During the life of this ORDER, the Insured Institution shall employ and thereafter retain qualified management. At a minimum, such management shall include a chief executive officer with proven ability in managing an insured institution of comparable size and a qualified senior loan officer who has experience in upgrading a low quality loan portfolio. Such persons shall be provided the necessary written authority to implement the provisions of this ORDER including clear responsibility for implementing and maintaining sound lending policies. The qualifications of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER;
       (ii) operate the Insured Institution in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
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       (iv) restore all aspects of the Insured Institution to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.

   [.2] (b) The board of directors shall, in no more than 90 days from the effective date of this ORDER, develop a written analysis and assessment of the Insured Institution's management and staffing needs ("management plan"), which shall include, at a minimum:
       (i) identification of both the type and number of officers and positions needed to manage and supervise properly the affairs of the Insured Institution;
       (ii) identification and establishment of such Insured Institution committees as are needed to provide guidance and oversight to active management;
       (iii) evaluation of each senior Insured Institution officer, and in particular the chief executive officer and senior loan officer, to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Insured Institution's established policies and practices, and maintenance of the Insured Institution in a safe and sound condition; and
       (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the board of director determines are necessary to fill Insured Institution officer or staff member positions consistent with the board's analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
   (c) Within 30 days from the effective date of this ORDER, the board shall advise the Regional Director of the San Francisco Regional Office of the FDIC ("Regional Director") and the Superintendent of Banks for the State of California ("Superintendent") of the identity of the person(s) or entity proposed to develop the management study. No officer of the Insured Institution may participate in the formulation of the management study.
   (d) The written management study and any subsequent modifications thereto shall be submitted to the Regional Director and the Superintendent for review and comment. No more than 30 days from the receipt of any comments from the Regional Director and the Superintendent, and after consideration of such comments, the board shall approve the written management study and any subsequent modification, which approval shall be recorded in the minutes of the board. Thereafter, the Insured Institution, its directors, officer and employees shall implement and follow the written management study and/or any subsequent modification.
   (e) During the life of this ORDER, the Insured Institution shall notify the Regional Director and the Superintendent in writing when it proposes to add any individual to the Insured Institution's board of directors or employ any individual as a senior 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(s) to be added or employed.
   (f) The Insured Institution may not add any individual to its board of directors or employ any individual as a senior officer if the FDIC issues a notice of disapproval pursuant to section 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73 § 914, 103 Stat. 183 (1989).

   [.3] 2. (a) Within 60 days from the effective date of this ORDER, the Insured Institution shall have Adjusted Primary Capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Insured Institution's Part 325 Total Assets. Thereafter, during the life of this ORDER, the Insured Institution shall maintain Adjusted Primary Capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Insured Institution's Part 325 Total Assets. Primary Capital and Part 325 Total Asset amounts utilized shall be calculated in accordance with prevailing instructions for the preparation of Reports of Condition. The ratio of Adjusted Primary Capital to 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 Adjusted 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
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       (ii) the sale of perpetual preferred stock; or
       (iii) the direct contribution of cash by the board of directors and/or shareholders of the Insured Institution; or
       (iv) the collection of assets previously charged off; or
       (v) the reduction of the "Loss" and "Doubtful" assets specified in Paragraph 3 of this ORDER without loss or liability to the Insured Institution; 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 Adjusted 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 Insured Institution'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 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 Adjusted 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 Insured Institution shall provide to any subscriber and/or proposed purchaser of the Insured Institution's securities 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 proposed purchaser of the Insured Institution's securities who received or was tendered the information contained in the Insured Institution's original offering materials.
   (e) For the purposes of this ORDER, the terms "Primary Capital" and "Part 325 Total Assets" shall have the meanings 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)).

   [.4] 3. (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-half of the assets classified "Doubtful" as of April 28, 1989, 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) Within 90 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard," assets listed for "special mention," and those assets classified "Doubtful" as of April 28, 1989 that have not previously been charged off to not more than $7,500,000.
   (c) Within 180 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard", assets listed for "special mention," and those assets classified "Doubtful" as of April 28, 1989 that have not previously been charged off to not more than $6,900,000.
   (d) Within 270 days from the effective date of this ORDER, the Insured Institu- {{4-1-90 p.C-192}}tion shall have reduced the assets classified "Substandard," assets listed for "special mention," and those assets classified "Doubtful" as of April 28, 1989 that have not previously been charged off to not more than $6,200,000.
   (e) Within 360 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard," assets listed for "special mention," and those assets classified "Doubtful" as of April 28, 1989 that have not previously been charged off to not more than $5,600,000.
   (f) Within 540 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard," assets listed for "special mention," and those assets classified "Doubtful" as of April 28, 1989 that have not previously been charged off to not more than $4,500,000.
   (g) Within 720 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard," assets listed for "special mention," and those assets classified "Doubtful" as of April 28, 1989 that have not previously been charged off to not more than $3,000,000.
   (h) The requirements of subparagraphs 3(a), 3(b), 3(c), 3(d), 3(e), 3(f), and 3(g) 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 3(b), 3(c), 3(d), 3(e), 3(f), 3(g), and 3(h) 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] 4. (a) 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, anyh borrower who has a loan or other extension of credit from the Insured Institution that has been charged off or classified, in whole or in part, "Loss" and is uncollected. This provision shall not prohibit the Insured Institution from renewing or extending the maturity of any credit in accordance with the Financial Accounting Standards Board Statement Number 15 ("FASB 15"), providing that such renewal or extension shall be made only with the prior approval of a majority of the board of directors.
   (b) 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 of the Insured Institution. Prior to the extending of any additional credit pursuant to this paragraph, either in the form of a renewal, extension, or further advance of funds, such additional credit shall be approved by a majority of the board of directors who shall certify in writing:
       (i) why the failure of the Insured Institution 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.
The signed certification shall be made a part of the minutes of the board of directors, and a copy of the signed certification shall be retained in the borrower's credit file. This provision 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.
   (c) In connection with subparagraph 4(a) and 4(b) 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 {{4-1-90 p.C-193}}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.

   [.6] (d) For the purpose of subparagraph 4(c) of this ORDER, debt is "well secured" if it is secured by:
       (i) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full; or
       (ii) by the guaranty of a financially responsible party.
   (e) For the purpose of paragraph 4(c) of this ORDER, 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.

   [.7] 5. (a) Within 60 days from the effective date of this ORDER, the Insured Institution shall revise or adopt and implement written lending and collection policies to provide effective guidance and control over the Insured Institution's lending function, which policies shall include specific guidelines for placing loans on non-accrual. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent.
   (b) The Insured Institution's written lending and collection policies required by this paragraph, at a minimum, shall include the following:

       (i) provisions which require complete loan documentation, realistic repayment terms and current credit information adequate to support the outstanding indebtedness of the borrower. Such documentation shall state the specific purpose for the credit, identify primary and secondary repayment sources, and contain an analysis of anticipated cashflow;
       (ii) provisions to insure perfection of liens on collateral, and require the use of documentation checklists;
       (iii) provisions to require complete and accurate reports to the board of directors and its committees advising them of the current status of interest and/or principal due, level and condition of collateral, recent discussion with the borrower, and management's evaluation of the loss potential of each loan and management's plan to minimize or avoid a loss;
       (iv) provisions to establish standards for specialized lending; for example, for extensions of credit for purchase of unlisted stock, or for restaurant or mobile home construction;
       (v) provisions that directors first 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; and,
       (vi) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $30,000 which are classified "Substandard" and "Doubtful" as of April 28, 1989 or by the FDIC or the California State Banking Department in subsequent Reports of Examination and all other loans in excess of $30,000 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.
   (c) 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.

   [.8] 6. Within 30 days from the effective date of this ORDER, the board of directors shall review the adequacy of the reserve for loan losses and establish 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 classified "Loss" or otherwise determined to be "Loss" items. The policy shall provide for a review of the reserve at least once each calendar quarter, {{4-1-90 p.C-194}}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 Reports of Condition and Income, 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.

   [.9] 7. The Insured Institution 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 Adjusted Primary Capital to total assets of the Insured Institution 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.

   [.10] 8. Within 60 days from the effective date of this ORDER, the Insured Institution shall formulate and implement a written profit plan. This 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) goals and strategies for improving and sustaining the earnings of the Insured Institution, including:

       (i) an identification of the major areas and the means by which the board of directors will seek to improve the Insured Institution's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Insured Institution 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.
   (b) coordination of the Insured Institution's loan, investment, and operating policies, and budget and profit planning, with the funds management policy.

   [.11] 9. Within 60 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 page 6-b of the Report of Examination of the Insured Institution as of April 28, 1989.

   [.12] 10. Following the effective date of this ORDER, the Insured Institution shall 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 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.

   [.13] 11. 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 Insured Institution 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 Insured Institution in writing from making further reports.
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   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.
   Pursuant to delegated authority.
   Dated at San Francisco, California, this 29th day of December, 1989.

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