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FDIC Enforcement Decisions and Orders

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{{12-31-93 p.C-1671}}
   [10,383] In the Matter of Community First Bank, Bakersfield, California, Docket No. FDIC-91-253b (11-15-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate management; operating with inadequate capital; operating with an excessive level of poor quality assets; operating with inadequate procedures for maintaining appropriate loan valuation reserve; following hazardous lending and lax collection practices; operating with inadequate liquidity and funds management policies; operating with inadequate routine and controls policies; operating in such a manner as to produce low earnings; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 10-28-93; see ¶ 15,745.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Special Mention—Correct Deficiencies
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Loan Loss Reserve—Establish/Maintain
   [.7] Lending and Collection Policy—Minimum Requirements
   [.8] Profit Plan—Minimum Requirements
   [.9] Violations of Law—Eliminate/Correct
   [.10] Asset/Liability Management—Written Policy—Minimum Requirements
   [.11] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.12] Reports of Condition and Income—Amendments Required
   [.13] Dividends—Restricted
   [.14] Bank Holding Company—Limitations on Fees Paid
   [.15] Shareholders—Disclosure—Cease and Desist Order
   [.16] Compliance Reports—Frequency

In the Matter of

COMMUNITY FIRST BANK
BAKERSFIELD, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Community First Bank, Bakersfield, California ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and/or regulations 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 Cor- {{12-31-93 p.C-1672}}poration ("FDIC"), dated November 15, 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/or 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/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, 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 inadequate procedures for determining and maintaining an appropriate loan valuation reserve;
   (e) following hazardous lending and lax collection practices;
   (f) operating with inadequate policies for liquidity and funds management;
   (g) operating with inadequate internal routine and control policies;
   (h) operating in such a manner as to produce low earnings; and

       (i) operating in violation of the following laws and/or regulations:
       (i) Section 215.4(a) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 214.4(a) made applicable to state non-member institutions by section 18(j)(2) of the Act, 12 U.S.C. 1828(j)(2), and as more fully described on page(s) 6-b and 2-d-3 of the Report of Examination as of May 6, 1991;
       (ii) Section 323.4(a) of the Rules and Regulations of the FDIC, 12 C.F.R. § 323.4(a), and as more fully described on page 6-b-1 of the Report of Examination as of May 6, 1991;
       (iii) Section 751.3 of the California Financial Code, Cal. Fin. Code § 751.3 (West 1989), and as more fully described on page 6-b-1 of the Report of Examination as of May 6, 1991; and
       (iv) Section 1201 of the California Financial Code, Cal. Fin. Code § 1201 (West 1989), and as more fully described on page 6-b-2 of the Report of Examination as of May 6, 1991.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. Within 90 days from the effective date of this Order, the Bank shall employ and thereafter retain senior management acceptable to the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Superintendent of Banks ("Superintendent").
   (a) 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;
       (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 and the 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.
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   [.2] 2. (a) During the life of this ORDER, the Bank shall maintain Tier 1 (core) capital in such an amount as to equal or exceed six and one-half (6.5) percent of the Bank's total assets.
   (b) Any increase in Tier 1 (core) 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, shareholders, and/ or parent holding company; 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.
   Any increase in Tier 1 (core) 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.
   (c) If all or part of the increase in Tier 1 (core) 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 core capital is provided by the sale of noncumulative perpetual 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 "Tier 1 (core) 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(m) and 325.2(n), as amended at 56 Fed. Reg. 10154, effective April 10, 1991.

   [.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 May 6, 1991, that have not been previously collected or charged off. Elimination of these assets through proceeds of 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 May 6, 1991 that have not
{{1-31-92 p.C-1674}}previously been charged off to not more than $10,000,000.
   (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of May 6, 1991 that have not previously been charged off to not more than $8,000,000.
   (d) Within 270 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of May 6, 1991 that have not previously been charged off to not more than $7,000,000.
   (e) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of May 6, 1991 that have not previously been charged off to not more than $6,000,000.
   (f) The requirements of subparagraphs 3(a), 3(b), 3(c), 3(d) and 3(e) 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), and 3(f) 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 90 days from the effective date of this ORDER, the Bank shall have reduced the assets listed for "Special Mention" as of May 6, 1991 to not more than $6,600,000.
   (b) Within 120 days from the effective date of this ORDER, the Bank shall have reduced the assets listed for "Special Mention" as of May 6, 1991 to not more than $5,300,000.
   (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets listed for "Special Mention" as of May 6, 1991 to not more than $2,800,000.
   (d) Within 270 days from the effective date of this ORDER, the Bank shall have reduced the assets listed for "Special Mention" as of May 6, 1991 to not more than $1,300,000.
   (e) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets listed for "Special Mention" as of May 6, 1991 to not more than $1,000,000.

   [.5] 5. (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" and is uncollected.
   (c) Paragraph 5(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:

       (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.

   [.6] 6. (a) During the life of this ORDER, the Bank shall maintain an adequate reserve for loan losses.
   (b) Additionally, during the life of this ORDER, the Board of Directors shall fully
{{1-31-92 p.C-1675}}implement its 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 shall be completed at least ten (10) days prior to the end of each quarter, 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 Bank's internal loan review, loan loss experience, trends of delinquent and nonaccrual 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 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 loan loss reserve consistent with the loan loss reserve policy established. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policy to provide effective guidance and control over the Bank's lending function, which policy shall include, at a minimum, revisions to address all items of criticism contained within the May 6, 1991 Report of Examination as well as specific guidelines for placing loans on a nonaccrual basis. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.8] 8. 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 the major areas in, and means by which, the board of directors will seek to improve the Bank's operating performance;
         (ii) realistic and comprehensive budgets;
         (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
         (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
       (b) coordination of the Bank's loan, investment, and operating policies, and budget and profit planning, with the funds management policy.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law which are more fully set out on pages 6-b, 2-d-3, 6-b-1, and 6-b-2 of the Report of Examination of the Bank as of May 6, 1991. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.10] 10. Within 60 days from the effective date of this ORDER, the board of directors shall develop, adopt and implement a comprehensive liquidity and asset/liability management policy. The policy shall establish standards consistent with generally accepted prudent banking operations by giving specific consideration to:

       (a) establishing a range for the Bank's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination;
       (b) 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";
       (c) establishing maturity ranges for the Bank's investment portfolio;
    {{1-31-92 p.C-1676}}(d) establishing acceptable ranges for the Bank's rate sensitivity and gap ratios; and
       (e) the establishing of 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.

   [.11] 11. 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 policies consistent with safe and sound banking practices. Such policy shall provide for the correction of all cited deficiencies within the May 6, 1991 Report of Examination and its implementation shall otherwise be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.12] 12. Within 10 days after eliminating from its books any asset in compliance with Paragraph 3 of this ORDER, the Bank shall file with the FDIC amended Consolidated Reports of Condition and Income which shall accurately reflect the financial condition of the Bank as of December 31, 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 California State Banking Department or FDIC examination of the Bank during that reporting period.

   [.13] 13. 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 Tier 1 (core) capital to total assets of the Bank will be not less than six and one-half (6.5) percent;
       (c) that such declaration and payment of dividends shall be approved in advance by the board of directors; and
       (d) that such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director and the Superintendent, which approval shall not be unreasonably withheld.

   [.14] 14. Within 30 days from the effective date of this ORDER, the Bank shall develop, adopt and implement a written policy satisfactory to the Regional Director and the Superintendent, which policy shall govern the relationship between the Bank and its holding company, and shall limit the payment of any management, consulting, or other fees or funds of any nature, directly or indirectly, to or for the benefit of the Bank's holding company to only those fees or funds paid in connection with necessary services actually performed by the Bank's holding company on behalf of or for the benefit of the Bank.

   [.15] 15. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Bank's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure 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.

   [.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 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, as- {{2-28-94 p.C-1677}}signs, 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 15th day of November, 1991.

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