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FDIC Enforcement Decisions and Orders

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{{11-30-94 p.C-939}}

   [10,210] In the Matter of Western Community Bank, Corona, California, Docket No. FDIC-91-90b (4-3-91).

   Bank to cease and desist from operating with inadequate management; operating with a large volume of poor quality loans; operating with an inadequate loan valuation reserve; following hazardous lending practices; operating with inadequate provisions for liquidity and funds management; operating with inadequate routine and controls policies; and operating with an inappropriate consulting agreement with bank directors. (This order was terminated by order of the FDIC dated 9-27-94; see ¶15,915.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Reduce/Eliminate
   [.4] Loans—Extensions of Credit—Existing Borrowers—Limits
   [.5] Loan Policy—Written Revision Required
   [.6] Concentrations of Credit—Written Policy Required
   [.7] Loan Loss Reserve—Establish/Maintain
   [.8] Funds Management and Liquidity—Written Policy Required
   [.9] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.10] Strategic Plan—Minimum Requirements—Review
   [.11] Assets—Total Assets—Limitations on Increase
   [.12] Accounting Procedures—Revision Required
   [.13] Institution—Affiliated Parties—Transactions With—Written Policy Required
   [.14] Reports of Condition and Income—Amendment Required
   [.15] Dividends—Restricted
   [.16] Consulting Agreements—Restricted—Approval Required
   [.17] Compensation—Directors/Officers—Review Required
   [.18] Brokered Deposits—Report to FDIC Required
   [.19] Shareholders—Disclosure—Cease and Desist Order
   [.20] Real Estate Activities—Compliance with State Law Required
   [.21] Compliance—Reports—Frequency

In the Matter of

WESTERN COMMUNITY BANK
CORONA, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Western Community Bank, Corona, California ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation {{11-30-94 p.C-940}}("FDIC"), dated March 26, 1991, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, 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 large volume of poor quality loans;
       (c) operating with an inadequate loan valuation reserve;
       (d) following hazardous lending practices;
       (e) operating with inadequate provisions for liquidity and funds management;
       (f) operating with inadequate routine and controls policies;
       (g) operating with a consulting agreement between the Bank, S. Eugene Stroud, and Margaret Stroud which provides for the payment of $125,000 to S. Eugene Stroud and Margaret Stroud over a period of three years for services relating to the operation of the Bank's consumer finance division.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. The Bank 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 Bank. Management should include a chief executive officer with proven ability in managing a Bank 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 and a chief financial officer with experience in financial and regulatory accounting, reporting and analysis, and tax planning at a Bank of comparable size. Each member of management shall be provided appropriate written authority from the Bank'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 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.
   (c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Superintendent of Banks ("Superintendent") in writing when it proposes to add any individual to the Bank's board of directors or employ any individual as a senior executive officer. The notification must be received at least 30 days before such addition or employment is intended to become effective and should include a description of the background and experience of the individual or individuals to be added or employed.
   (d) The Bank may not add any individual to its board of directors or employ any individual as a senior executive officer if the Regional Director issues a notice of disapproval pursuant to section 32 of the Act, 12 U.S.C. § 1831i.

   [.2] 2. (a) During the life of this ORDER, the Bank shall maintain adjusted primary capital in such an amount as to equal or exceed nine and one-half (9.5) percent of the Bank's adjusted Part 325 total assets. Primary capital and Part 325 total assets utilized 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 {{6-30-91 p.C-941}} be determined by using the procedures outlined in the "Analysis of Capital" 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 Section, Washington, D.C. 20419, 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 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 meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 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 September 24, 1990, 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 90 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of September 24, 1990 that have not previously been charged off to not more than $4,600,000.
   (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of September 24, 1990 that have not previously been charged off to not more than $4,000,000.
   (d) Within 270 days from the effective {{6-30-91 p.C-942}}date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of September 24, 1990 that have not previously been charged off to not more than $3,200,000.    (e) The requirements of subparagraphs 3(a), 3(b), 3(c) and 3(d) 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), 3(d) and 3(e) 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 adopt and implement written policies to limit concentrations of credit with respect to total loans and total capital. Such policies, at a minimum, shall address limits on the overall volume of construction loans and limits by type of loan. In addition, the Bank shall develop a written plan, approved by its board of directors and acceptable to the Regional Director and the Superintendent to restructure the mix of the loan portfolio in order to {{6-30-91 p.C-943}}comply with the policy limitations, and to create a system to monitor future compliance.

   [.7] 7. Within 10 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for loan losses. In addition to a sufficient reserve for the general loan portfolio, the portion of the reserve allocated to protect against potential losses in the automobile loan portfolio shall be increased to a level commensurate with the high risk of loss in that portfolio. Such reserves 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 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 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written liquidity, funds management and investment policies. Specifically, such policies shall limit the Bank's use of volatile liabilities to fund loan growth. 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.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written policy for the operation of the Bank in such a manner as to provide adequate internal routine and control policies consistent with safe and sound banking practices and to correct the deficiencies scheduled on pages 6-a and 6-a-1 of the Report of Examination of the Bank as of September 24, 1990. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/ or visitations.

   [.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt and implement a strategic plan which identifies the Bank's operating and marketing goals, organizational structure, managerial, financial and personnel requirements to implement and monitor the goals, and outlines strategies for successful achievement of the objectives within the constraints of safe and sound banking practices. The plan should also include pro forma financial statements and budgets based on various economic and operating forecasts.

   [.11] 11. During the life of this ORDER, the Bank shall not undertake any plan or arrangement designed to increase its assets by more than seven and one-half (7.5) percent during any consecutive three-month period unless such plan or arrangement has received the prior written approval of the Regional Director and the Superintendent, which approval shall not be unreasonably withheld.

   [.12] 12. Within ten days of the effective date of this ORDER, the Bank shall implement proper accounting procedures. Specifically, the Bank shall implement a method of accounting that results in the recognition of loan income on a level yield basis in accordance with Financial Accounting Standards Board No. 91. In addition, the Bank shall implement accounting procedures to recognize loan losses on automobile loans in accordance with generally accepted accounting principles and the Instructions for the Reports of Condition and Income.

   [.13] 13. Within 60 days of the effective date of this ORDER, the Bank shall devise, adopt and implement a written policy which shall govern insider transactions between the Bank and its directors, officers, principal shareholders and their related interests.

   [.14] 14. Within 60 days of the effective date of this ORDER, the Bank shall file with the FDIC and the Superintendent amended Consolidated Reports of Condition and Income which shall accurately reflect the financial condition of the Bank as of December 31, 1989, March 31, 1990. June 30, 1990, September 30, 1990 and December 31, 1990. The amendments should correct the inaccuracies related to improper accounting for interest income on purchased automobile contracts, understated loan losses, and other errors previously provided to management. Thereafter, during the life of this ORDER, the Bank shall file with the FDIC and the Superintendent Consolidated Reports of Condition and Income which accurately reflect the financial condition Bank as of the end of the period for which the Reports are filed, including any adjustment {{6-30-91 p.C-944}}in the Bank's books made necessary or appropriate as a consequence of any FDIC or State examination of the Bank during that reporting period.

   [.15] 15. During the life of this ORDER, the Bank 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 Bank will be not less than nine and one-half (9.5) 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.

   [.16] 16. The Bank shall rescind the June 18, 1989 consulting agreement between the Bank, S. Eugene Stroud, and Margaret Stroud ("Consulting Agreement"). Prior to entering into any consulting agreements with any current or future directors, the Bank shall receive the prior written approval of the Regional Director and the Superintendent.
   17. Within 30 days of the effective date of this ORDER, the Bank shall provide substantiation satisfactory to the Regional Director for the June 18, 1990 payment of $30,000 made to S. Eugene Stroud and/or Margaret Stroud pursuant to the Consulting Agreement.

   [.17] 18. During the life of this ORDER, the Bank shall not increase or provide additional compensation to directors without the prior written consent of the Regional Director and the Superintendent. In addition, within 60 days of the date of this ORDER, the Bank shall review and study the current director and executive officer compensation packages and organizational structure. This review shall include the following:

       (a) a critical analysis of each individual's duties and responsibilities, and an appraisal of each individual's performance compared to the present level of compensation:
       (b) a determination of whether the present management team is capable of implementing board directives, operating within the constraints of laws and regulations, and operating the Bank in a prudent manner;
       (c) the development of comprehensive job descriptions; and
       (d) the development of an organizational chart to delineate formal lines of communication and reporting. A copy of the board's findings and a summary of the conclusions shall be provided to the Regional Director and Superintendent upon completion of the study. For the purpose 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.

   [.18] 19. 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 large out-of-area deposits; deposits obtained through a deposit broker; or any deposits solicited by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter as the Bank in the Bank's normal market area. The notification should indicate how such 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 such deposits.

   [.19] 20. 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 Section, 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.

   [.20] 21. During the life of this ORDER, the Bank shall not engage in real estate activities pursuant to section 751.3 of the {{12-31-91 p.C-945}}California Financial code without the prior written consent of the Regional Director and the Superintendent.

   [.21] 22. 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 3rd day of April, 1991.

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