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FDIC Enforcement Decisions and Orders

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{{5-31-94 p.C-1073}}
   [10,261] In the Matter of Independence Bank, Los Angeles, California, Docket No. FDIC-91-49b (6-7-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate management; operating with inadequate capital; operating with excessive volumes of adversely classified assets; operating with inadequate loan valuation reserve; operating with inadequate routine and controls policies; operating with inadequate provisions for funds management and liquidity; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 3-23-94; see ¶ 15,835.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Primary Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Loan Policy—Written Revision—Minimum Requirements
   [.6] Loan Loss Reserve—Establish/Maintain
   [.7] Investments—Joint Ventures—Written Policy Required
   [.8] Violations of Law—Eliminate/Correct
   [.9] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.10] Dividends—Restricted
   [.11] Asset/Liability Management—Policy Revision Required
   [.12] Appraisal Policy—Joint Venture Properties
   [.13] Reports of Condition and Income—Amendment Required
   [.14] Real Estate Activities—Compliance with State Law Required
   [.15] Shareholders—Disclosure—Cease and Desist Order
   [.16] Compliance Reports—Frequency

In the Matter of

INDEPENDENCE BANK
LOS ANGELES, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   The Federal Deposit Insurance Corporation ("FDIC"), on February 20, 1991, issued to Independence Bank, Los Angeles, 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. The Bank and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE {{5-31-94 p.C-1074}}AND DESIST ("CONSENT AGREEMENT"), dated June 6, 1991, 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 regulations, 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 regulations. 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 and violations:

       (a) operating with inadequate management;
       (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 assets;
       (d) operating with an inadequate loan valuation reserve;
       (e) following hazardous lending and lax collection practices;
       (f) operating with inadequate routine and controls policies; and
       (g) operating with inadequate provisions for liquidity and funds management; and
       (h) operating in violation of section 10.6008(c) of the California Administrative Code and sections 1513 and 1912 of the California Financial Code.

   [.1] 1. During the life of this ORDER the Bank shall 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 shall include all senior executive officers of the Bank. Such management at a minimum should include a chief executive officer with proven ability in managing a financial institution and experience in upgrading low quality assets. Management should also include 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. 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 for the State of California ("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.
       (e) The term "senior executive officer" shall include but is not limited to, the following positions: President, chief executive officer, chief operating officer, chief financial officer, chief lending officer and chief investment officer. The term "senior executive officer", shall, in addition, have the meaning set forth in Part 303.14(a)(3) of the FDIC Rules and Regulations.

   [.2] 2. (a) Within 60 days from the effective date of this ORDER, the Bank shall increase its primary capital by no less than $10,000,000, and shall have adjusted pri- {{8-31-91 p.C-1075}}mary 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 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" 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. 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 meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. §§ 325.2(h) and 325.2(k) as existing on the date of examination.
   [.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" and one-half of the assets classified "Doubtful" as of August 24, 1990, that have not been previously collected or charged off.
{{8-31-91 p.C-1076}}Elimination of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   (b) By September 30, 1991, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of August 24, 1990, to not more than $40,000,000, excluding those certain classified assets in which the Bank has contractually extended maturity dates, which assets are set forth at page 6 of that certain schedule attached to an April 30, 1991 letter from the Bank to the FDIC and more specifically described as: Barcon Development; Steve Teitlbaum; Trend Products; ACC-LEO (Dutton); Courtyard Associates (disbursed); Courtyard Associates (undisbursed); RG Corporation (disbursed); RG Corporation (undisbursed) and La Habra Manor, ("Extended Term Assets").
   (c) By December 31, 1991, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of August 24, 1990, to not more than $34,000,000, excluding the Extended Term Assets.
   (d) By March 31, 1992, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of August 24, 1990, to not more than $27,000,000, excluding the Extended Term Assets.
   (e) By June 30, 1992, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of August 24, 1990, to not more than $22,000,000, excluding the Extended Term Assets.
   (f) By September 30, 1992, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of August 24, 1990, to not more than $17,000,000, excluding the Extended Term Assets.
   (g) By December 31, 1992, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of August 24, 1990, to not more than $13,000,000, excluding the Extended Term Assets.
   (h) The requirements of subparagraph 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 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), 3(e), 3(f), 3(g), 3(h) and 3(i) 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.
   (i) The Extended Term Assets shall be reduced by the Bank as soon as possible consistent with contractually committed obligations. For purposes of this ORDER only, $5.9 million or twenty percent (whichever is greater) of the remaining aggregate balance of the Extended Term Assets, shall be, unless otherwise reduced, charged-off per annum commencing with the quarter-ended June 30, 1992.

   [.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. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.
   (b) Additionally, during the life 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" or "Doubtful" and is uncollected.
   (c) Paragraph 4(b) shall not apply if the Bank's failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank. 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, or a designated committee thereof, who shall certify, in writing:
{{8-31-91 p.C-1077}}

       (i) why the failure of the Bank to extend such credit would be detrimental to the best interests of the Bank;
       (ii) that the Bank's position would be improved thereby; and
       (iii) how the Bank's position would be improved.
   The signed certification shall be made a part of the minutes of the board of directors or designated committee, and a copy of the signed certification shall be retained in the borrower's credit file.

   [.5] 5. (a) 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.
   (b) The Bank's loan policy and practices, required by this paragraph shall include the following:

       (i) provisions, consistent with FDIC instructions for the preparation of Reports of Condition and Income, under which the accrual of interest income is discontinued and previously accrued interest is reversed on delinquent loans;
       (ii) provisions which prohibit the capitalization of interest or loans related expense unless the board of directors supports in writing and records in the minutes of the corresponding board of directors meeting why an exception thereto is in the best interests of the Bank;
       (iii) 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 include current financial information, profit and loss statements or copies of tax returns and cash flow projections;
       (iv) provisions which establish standards for unsecured credit;
       (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;
       (vi) provisions which require the preparation and maintenance of a loan "watch list" which shall include relevant information on all loans in excess of $500,000 which are classified "Substandard" and "Doubtful" as of August 24, 1990 or by the FDIC or the State Banking Department in subsequent Reports of Examination and all other loans in excess of $500,000 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
       (vii) 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 all members are present and the vote of each is noted.

   [.6] 6. (a) Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for loan losses.
   (b) Additionally, within 30 days from the effective date of this ORDER, the board of directors shall develop or revise, adopt and implement a comprehensive policy for determining the adequacy of the reserve for loan losses. For the purpose of this determination, the adequacy of the reserve shall be determined after the charge-off of all loans or other items classified "Loss". The policy shall provide for a review of the reserve at least once each calendar quarter. Said review should be completed in such time so 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 Bank'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 con- {{8-31-91 p.C-1078}}ditions. 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 Bank 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 Superintendent as determined at subsequent examinations and/or visitations.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt, and implement a policy to provide effective controls over the Bank's joint venture investments. The policy shall establish, at a minimum, procedures which will address and eliminate all areas of deficiency in the Bank's current joint venture activities, as more fully described in the Report of Examination of the Bank as of August 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.

   [.8] 8. Within 30 days from the effective date of this ORDER, the Bank shall eliminate and correct all violations of law which are more fully set out on page 6-b of the Report of Examination of the Bank as of August 24, 1990. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.9] 9. Within 30 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 adequate internal routine and control policies consistent with safe and sound banking practices. Such policy shall contain, at a minimum, provisions which eliminate all cited deficiencies described on page 6-a of the Report of Examination of the Bank as of August 24, 1990. The policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/ or visitations.

   [.10] 10. 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 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.

   [.11] 11. Within 30 days from the effective date of this ORDER, the board of directors shall revise, adopt, and implement a comprehensive asset/liability management policy. The policy shall establish standards consistent with generally accepted prudent banking operations by giving specific consideration to:
       (i) establishing a range for the Bank's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination, and excluding the impact, if any, of the consolidated third party debt of real estate joint ventures, and which ratio shall, by December 31, 1991 be reduced to not more than ten (10) percent. The requirements of this paragraph shall not be construed as standards for future operations, and the Bank's volatile liability dependency ratio shall be maintained at a level consistent with prudent banking practices; and
       (ii) establishing a minimum liquidity ratio, as computed by FDIC in its Report of Examination, and excluding the impact, if any, of the consolidated third party debt of real estate joint ventures, which ratio shall be not less than twenty (20%) percent. This ratio shall be attained no later than December 31, 1991, and maintained during the life of this ORDER. 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. (a) During the life of this ORDER the Bank shall implement its policy for the appraisal of joint venture properties. At a minimum, such policy shall:
       (i) specify the circumstances and con-
{{8-31-93 p.C-1079}}
    ditions under which real estate appraisals must be conducted by an independent third party;
       (ii) specify the circumstances and conditions under which real estate appraisals must be conducted by an independent third party;
       (ii) establish guidelines for obtaining and reviewing appraisals;
       (iii) establish criteria for selecting appraisers;
       (iv) establish the maintenance of a listing of approved appraisers;
       (v) require appraisals to be based on a specific definition of market value. The definition of "market value" must be the same as that used by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation;
       (vi) require appraisals to be in narrative form; and
       (vii) require appraisals to contain a prior sales history of the appraised property.
   (b) Such policy and its implementation shall be satisfactory to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

   [.13] 13. 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 made necessary or appropriate as a consequence of any California State Banking Department or FDIC examination of the Bank during that reporting period.

   [.14] 14. During the life of this ORDER, the Bank shall not engage in any additional real estate activities as defined in Section 751.3 of the California Financial Code without the prior written approval of the Regional Director and Superintendent.

   [.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.

   [.16] 16. Within 30 days of the end of the first quarter following the effective date of this ORDER, and within thirty (30) days of the end of each quarter thereafter, the Bank shall furnish written progress reports to the Regional Director 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 has released the Bank in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Bank and all institution-affiliated parties.
   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 7th day of June, 1991.
   Pursuant to delegated authority.

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