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[¶10,488] In the Matter of Capital Bank of California, Los Angeles, California, Docket No. FDIC-91-179b (3-31-92).
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 allowance for loan and lease losses; following hazardous lending and lax collection practices; operating without proper internal routine and controls; operating in such a manner as to produce operating losses; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 3-25-94; see ¶ 15,840.)
[.1] Management—Qualifications—Review
[.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
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[.3] Assets—Adversely Classified—Eliminate/Reduce
[.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
[.5] Lending and Collection Policy—Minimum Requirements
[.6] Loan Loss Reserve—Establish/Maintain
[.7] Profit Plan—Minimum Requirements
[.8] Violations of Law—Eliminate/Correct
[.9] Asset/Liability Management—Policy Required
[.10] Bank Operations—Internal Routine and Controls—Written Policy Required
[.11] Dividends—Restricted
[.12] Brokered Deposits—Reduction Required
[.13] Shareholders—Disclosure—Cease and Desist Order
[.14] Real Estate Activities—Compliance with State Law Required
[.15] Compliance Reports—Frequency
In the Matter of
CAPITAL BANK OF CALIFORNIA
LOS ANGELES, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
The Federal Deposit Insurance Corporation ("FDIC"), on January 15, 1992, issued to Capital Bank of California, 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 and violations of law and/or regulations.
The insured institution and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated March 19, 1992, whereby, solely for the purpose of this proceeding and without admitting or denying the allegations in the NOTICE, 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 loans;
(d) operating with an inadequate loan valuation reserve;
(e) following hazardous lending and lax collection practices;
(f) operating with inadequate provisions for funds management;
(g) operating with inadequate routine and controls policies;
(h) operating in such a manner as to produce operating losses; and
(i) operating in violation of Section 772(a) of the California State Banking Department Financial Code, and related regulations, as more fully described on page 6-a of the Report of Examination as of March 31, 1991.
IT IS FURTHER ORDERED that the Bank take affirmative action as follows:
[.1] 1. During the life of this ORDER,
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the Bank shall maintain qualified management.
(a) The Bank shall on or before June 30, 1992, employ and retain 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 ("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) By June 30, 1992, the Bank shall increase Tier 1 capital by no less than $1,000,000, or such greater amount as is necessary to increase its Tier 1 capital to six and one-half (6.5) percent of the Bank's total assets. Thereafter, during the life of this ORDER, the Bank shall maintain Tier 1 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 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) the Bank's retained earnings; or
(v) the conversion of the Bank's existing convertible debt instruments to a form qualifying as Tier 1 capital; or
(vi) any other means acceptable to the Regional Directors; or
(vii) any combination of the above means.
(c) 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.
(d) 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
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their dissemination. If the increase in core 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.
(e) 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.
(f) 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) 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 March 31, 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) By May 1, 1992, the Bank shall have reduced the assets classified "Substandard" as of March 31, 1991 that have not previously been charged off to not more than $28,000,000.
(c) By August 1, 1992, the Bank shall have reduced the assets classified "Substandard" as of March 31, 1991 that have not previously been charged off to not more than $27,000,000.
(d) By November 1, 1992, the Bank shall have reduced the assets classified "Substandard" as of March 31, 1991 that have not previously been charged off to not more than $25,800,000.
(e) By February 1, 1993, the Bank shall have reduced the assets classified "Substandard" as of March 31, 1991 that have not previously been charged off to not more than $21,800,000.
(f) By May 1, 1993, the Bank shall have reduced the assets classified "Substandard" as of March 31, 1991 that have not previously been charged off to not more than $18,000,000.
(g) By August 1, 1993, the Bank shall have reduced the assets classified "Substandard" as of March 31, 1991 that have not previously been charged off to not more than $10,000,000.
(h) The requirements of subparagraphs 3(a), 3(b), 3(c), 3(d) 3(e), 3(f), and 3(g) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the 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), and 3(h) the word "reduce" means:
(i) to collect;
(ii) to charge-off; or
(iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.
[.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
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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:
(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. During the life of this ORDER, the Bank shall fully implement its 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. (a) Within 10 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 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 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 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.
[.8] 8. Within 30 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-a of the
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Report of Examination of the Bank as of March 31, 1991. 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 board of directors shall implement an asset/liability management policy. The policy shall include the establishment of a range for the Bank's volatile liability dependency ratio which includes money desk funds, as computed by the FDIC in its Reports of Examination, and which ratio shall, by June 30, 1992, be reduced to not more than fifteen (15.0) percent; and by December 31, 1992, be reduced to not more than ten (10.0) percent. The requirements of this paragraph shall not be construed as standards for future operations, and the Bank's volatile liability dependency ratio (including money desk funds) shall be maintained at a level consistent with prudent banking practices.
[.10] 10. By April 30, 1992, 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 deficiencies cited in the Report of Examination as of March 31, 1991 and its implementation shall otherwise be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
[.11] 11. 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 Tier 1 capital of the Bank will be not less than six and one-half (6.5) percent of the Bank's total assets, and the reserve for loan losses shall be at an adequate level;
(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 with-held.
[.12] 12. Upon the effective date of this ORDER, the Bank shall not increase the amount of brokered deposits and money desk funds above the amount outstanding on that date. Within thirty (30) days of the effective date of this ORDER, the Bank shall submit to the Regional Director and the Superintendent a written plan for eliminating its reliance on brokered deposits and money desk funds. The plan should contain details as to the current composition of brokered deposits and money desk funds by maturity and explain the means by which such deposits and funds will be paid or rolled over. The Regional Director and the Superintendent shall have the right to reject the Bank's plan. For purposes of this ORDER, the definition to be ascribed to the term brokered deposit is set forth in 12 C.F.R. Section 337.6, and shall include any deposits funded by third party agents or nominees for depositors, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or asserts a right to federal deposit insurance.
[.13] 13. 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.
[.14] 14. During the life of this ORDER, the Bank shall furnish to the Regional Director a copy of any application to the Superintendent filed pursuant to Section 751.3 of the California Financial Code, Cal. Fin. Code § 751.3 (West 1989), to engage in real estate activities. This copy of such application shall be furnished to the Regional Director on or before the date of its filing with the Superintendent. In no event shall the Bank engage in real estate activities which are the subject of any such application filed pursuant to Section 751.3 of the California Financial Code without the prior written consent of the Regional Director.
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[.15] 15. 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.
Dated at San Francisco, California, this 31st day of March, 1992.
Pursuant to delegated authority.
