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FDIC Enforcement Decisions and Orders

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   [10,278] In the Matter of First California Bank, La Mesa, California, Docket No. FDIC-91-204b (7-18-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate management; operating with inadequate capital; operating with inadequate loan valuation reserve; following hazardous lending and lax collection practices; operating with inadequate provisions for liquidity and funds management; operating with inadequate routine and controls policies; and operating in such a manner as to produce low earnings. (This order was terminated by order of the FDIC dated 1-27-94; see ¶ 15,798.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Lending and Collection Policy—Written Revision Required
   [.5] Loans—Concentrations—Reduce
   [.6] Loan Loss Reserve—Establish/Maintain
   [.7] Board of Directors—Meetings—Frequency
   [.8] Asset/Liability Management—Written Policy Required
   [.9] Assets—Limitations on Increase
   [.10] Joint Venture Subsidiary—Written Policy Required
   [.11] Real Estate Activities—Compliance with State Law Required
   [.12] Bank Operations—Internal Routine and Controls—Written Policy Required.
   [.13] Violations of Law—Eliminate/Correct
   [.14] Profit Plan—Minimum Requirements
   [.15] Strategic Plan—Preparation Required
   [.16] Compensation Plan—Review Required
   [.17] Reports of Condition and Income—Amendment Required
   [.18] Dividends—Restricted
   [.19] Shareholders—Disclosure—Cease and Desist Order
   [.20] Compliance Reports—Frequency

In the Matter of

FIRST CALIFORNIA BANK
LA MESA, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   First California Bank, La Mesa, 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 ("FDIC"), dated July 16, 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 {{3-31-94 p.C-1190}}U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices;
   (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 provisions for liquidity and funds management;
   (g) operating with inadequate routine and controls policies; and
   (h) operating in such a manner as to produce low earnings.
   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 appropriate experience and abilities. 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") an 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.

   [.2] 2. (a) Within 60 days from the effective date of this ORDER, the Bank shall increase Tier 1 capital by no less than $1,000,000.
   (b) Within 180 days from the effective date of this ORDER the Bank shall increase Tier I capital by no less than an additional $1,000,000.
   (c) Within 270 days from the effective date of this ORDER, the bank shall increase Tier I capital by no less than an additional $1,000,000 and shall have Tier I capital in such an amount as to equal or exceed seven (7.0) percent of the Bank's total assets. Thereafter, during the life of this ORDER, the Bank shall maintain Tier I capital in such an amount as to equal or exceed seven (7.0) percent of the Bank's total assets.
   (d) Within 60 days from the effective date of this ORDER, the Bank shall develop and adopt a plan to meet the minimum risk-based capital requirements as described in the FDIC Statement of Policy on Risk-Based Capital contained in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, Appendix A. The plan shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations.
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   (e) Any increase in Tier 1 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 noncumulative perpetual preferred stock; or
       (iii) the direct contribution of cash by the board of directors and/or shareholders of the Bank; or
       (iv) any other means acceptable to the Regional Director and the Superintendent; or
       (v) any combination of the above means.
   Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 2 of this ORDER may not be accomplished through a deduction from the Bank's loan loss reserves.
   (f) If all or part of the increase in Tier 1 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 Tier 1 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.
   (g) 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 with 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.
   (h) For the purposes of this ORDER, the terms "Tier 1 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(m) and 325.2(n), as amended at 56 Fed. Reg. 10154, effective April 10, 1991.

   [.3] 3. (a) On the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of January 23, 1991, 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 120 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of January 23, 1991 that have not previously been charged off to not more than $15,500,000.
   (c) Within 240 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of January 23, 1991 that have not previously been charged off to not more than $11,000,000.
   (d) Within 365 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of January 23, 1991 that have not previously been charged off to not more than $5,000,000.
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   (e) The requirements of subparagraphs 3(a), 3(b), 3(c), and 3(d) of the 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) 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, which policies shall include specific guidelines for placing loans on a non-accrual basis. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. 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 initial revisions to the Bank's loan policy and practices, required by this paragraph, at a minimum, shall include the following:

       (i) provisions, consistent with FDIC instructions for the preparation of Reports of Condition and Income, under which the accrual of interest income is discontinued and previously accrued interest is reversed on delinquent loans;
       (ii) provisions which prohibit the capitalization of interest or loan related expense unless the board of directors supports in writing and records in the minutes of the corresponding board of directors meeting why an exception thereto is in the best interests of the Bank;
       (iii) provisions which prohibit the making of additional loans to pay interest or loan related expense unless the board of directors supports in writing and records in the minutes of the corresponding board of directors meeting why an exception thereto is in the best interests of the Bank;
       (iv) 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;
       (v) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values;
       (vi) provisions which specify the circumstances and conditions under which real estate appraisals must be conducted by an independent third party and provisions requiring internal review of appraisals by senior management;
       (vii) provisions which establish standards for unsecured credit;
       (viii) provisions which establish officer lending limits;
       (ix) provisions that require extensions of credit to any of the Bank's executive officers, directors, or principal shareholders, or to any related interest of such persons, to be approved in advance by a majority of the entire board of directors in accordance with section 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(b);
       (x) 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;
       (xi) provisions which prohibit concentrations of credit in excess of 25 percent of the Bank's total equity capital and reserves to any borrower and that borrower's related interests;
       (xii) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans which are classified "Substandard" as of January 23, 1991 or by the FDIC or the Superintendent in subse- {{9-30-91 p.C-1193}}quent Reports of Examination and all other loans 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
       (xiii) 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.
   [.5] 5. Within 60 days from the effective date of this ORDER, the Bank shall develop and submit to the FDIC a plan, which is acceptable to the Regional Director, to reduce concentrations in real estate related loans as specified on pages 2-b, 2-b-1, and 2-b-2 of the Report of Examination as of January 23, 1991. In addition, the Bank's loan policy and strategic plan shall prohibit loans to any borrower or associated entities which will exceed twenty-five (25) percent or more of the Bank's total equity capital and reserves.

   [.6] 6. Within 10 days from the effective date of this ORDER, 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 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.

   [.7] 7. Within 30 days from the effective date of this ORDER, the board of directors shall increase its participation in the affairs of the Bank, assuming full responsibility for the formulation of sound policies and objectives and for the supervision of all of the Bank's activities. This participation shall include meetings to be held no less frequently than monthly, at which, at a minimum, the following areas are reviewed and approved; activities of First La Mesa Realty Corporation ("FLMRC"), reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity; operating policies; and individual committee actions. Board minutes shall document these reviews and approvals, including the names of any dissenting directors.

   [.8] 8. (a) Within 60 days from the effective date of this ORDER, the board of directors shall develop a comprehensive asset/liability management policy in a form and manner acceptable to the Regional Director and Superintendent. The policy shall establish standard 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;
       (ii) establishing a range for short-term investments to potentially volatile liabilities, as those terms are defined by the FDIC in its current edition of "A Users Guide for the Uniform Bank Performance Report";
       (iii) establishing maturity ranges for the Bank's investment portfolio;
       (iv) establishing acceptable ranges for the Bank's rate sensitivity gap ratios; and
       (v) establishing an asset/liability committee, including a description of its responsibilities, how often it will meet, how it will obtain information and guidance from the board of directors, and how its activities will be reported to the board of directors.

   [.9] 9. During the life of this ORDER, the Bank shall provide prior written notice to the Regional Director when it plans to increase its assets by 7.5 percent or more during any three month period.

   [.10] 10. During the life of this ORDER, the Bank shall ensure that its wholly-owned subsidiary, FLMRC, a joint venture subsidiary, shall refrain from engaging in any activity which jeopardizes its status as a limited partner in its joint venture activities and that FLMRC shall not incur liability as a general partner, for tax purposes or otherwise. Within 60 days from the effective date {{9-30-91 p.C-1194}}of this ORDER, the Bank shall formulate and implement written policies and procedures acceptable to the Superintendent and the Regional Director, which shall include the following:
   (a) Provisions requiring the establishment and maintenance of an adequate allowance for estimated losses on real estate investments. In determining the adequacy of the allowance, the Bank shall require the regular review of the relevant factors affecting the market value of each of FLMRC's assets prior to the end of each calendar quarter. Any deficiency in the reserve shall be remedied in the calendar quarter it is discovered by a charge to current operating earnings of FLMRC;
   (b) Provisions for accurately accounting for assets and liabilities, income and expense recognition, and for certifying accounts;
   (c) Provisions requiring complete documentation, including but not limited to, full, complete and current appraisals on projects, feasibility studies on projects, analyses of the financial condition of any partners or other investors in each project, and an analysis of the fairness of the profit percentage which FLMRC is to receive on each project in relation to its investment;
   (d) Provisions which require separate corporate identities and records including provisions which address the sharing of office space and personnel, and which generally address the concerns more fully set out on page 6-d-1 of the Report of Examination of the Bank as of January 23, 1991;
   (e) Provisions which require monthly inspections and the preparations of status reports on all projects. The reports shall describe the action taken to sell or otherwise dispose of the projects;
   (f) Provisions which require that a committee of at least three non-officer directors of the Bank be established to monitor compliance with the revised policies and procedures. Such committee will prepare monthly progress reports to the board of the Bank.

   [.11] 11. During the life of this ORDER, the Bank shall refrain from engaging in real estate activities allowed by section 751.3 of the California Financial Code. This provision shall not be construed to prohibit the orderly resolution of such activities which were engaged in as of January 23, 1991.

   [.12] 12. Within 60 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 practices which should specifically provide for the correction of deficiencies contained on pages 6-C, 6-C-1, and 6-C-2 of the Report of Examination as of January 23, 1991. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.13] 13. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct the violation of law which is more fully set out on page 6-b of the Report of Examination of the Bank as of January 23, 1991. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.14] 14. Within 60 days from the effective date of this ORDER, the Bank 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 Bank, including:

       (i) an identification of 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.
   (b) coordination of the Bank's loan, investment, and operating policies, and budget and profit planning, with the funds management policy.

   [.15] 15. Within 60 days from the effective ate of this ORDER, the Bank shall formulate and implement a written strategic plan. This plan shall be comprehensive in nature stating the Bank's overall goals, and the methods to be employed to achieve those {{9-30-91 p.C-1195}}goals. The plan must specifically address the Bank's plans regarding the future of FLMRC. The plan must provide for the fulfillment of all provisions of this ORDER, and shall be forwarded to the Regional Director and to the Superintendent for review and comment.

   [.16] 16. Within 60 days from the effective date of this ORDER, the Bank shall adopt an employee compensation plan after undertaking a review of compensation paid to all members of the Bank's senior management team. At a minimum the review shall include the following:
   (a) a critical analysis of each individual's background, experience, duties and responsibilities, and an appraisal of each individual's performance compared to the present level of compensation;
   (b) a comparison of each officer's total compensation with compensation received by officers with similar responsibilities in similar institutions;
   (c) a determination of whether present members of senior management are capable of implementing board directives and policies, operating within the constraints of laws and regulations, and operating the Bank in a prudent manner. For the purpose of this paragraph, "compensation" refers to any and all salaries, bonuses, retirement annuities, and other benefits of every kind and nature whatsoever, whether paid directly or indirectly. The compensation plan and its implementation shall be in the form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.17] 17. Within 10 days after eliminating from its books any asset in compliance with Paragraphs 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 September 30, 1990, December 31, 1990, and March 31, 1991. 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 made necessary or appropriate as a consequence of any State or FDIC examination of the Bank during that reporting period.

   [.18] 18. During the life of this ORDER, the Bank shall not pay cash dividends without the prior written consent of the Regional Director.

   [.19] 19. 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] 20. 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 18th day of July, 1991.

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