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[¶10,527] In the Matter of First Community Bank of the Desert, Yucca Valley, California, Docket No. FDIC-92-121b (5-4-92).
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; following hazardous lending and lax collection practices; and operating in such a manner as to produce low earnings.
[.1] Management—Qualifications—Review
[.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
[.3] Assets—Adversely Classified—Eliminate/Reduce
[.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
[.5] Lending and Collection Policy—Minimum Requirements
[.6] Loans—Concentrations of Credit—Reduction Plan
[.7] Loan Loss Reserve—Establish/Maintain
[.8] Investments—Joint Ventures—Liquidation Required
[.9] Budget and Earnings Forecast—Preparation Required
[.10] Real Estate Activities—Appraisals Required
[.11] Accounting—Subsidiaries
[.12] Dividends—Restricted
[.13] Real Estate Activities—Compliance with State Law Required
[.14] Shareholders—Disclosure—Cease and Desist Order
[.15] Compliance Reports—Frequency
In the Matter of
FIRST COMMUNITY BANK OF THE
DESERT
YUCCA VALLEY, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-121b
First Community Bank of the Desert, Yucca Valley, 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
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AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated April 15, 1992, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED that the Bank, and any institution-affiliated party as such term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices:
(a) operating with inadequate management;
(b) operating with 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) following hazardous lending and lax collection practices; and
(e) 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, 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 in upgrading a low quality loan portfolio. Each member of management shall be provided appropriate written authority from the Bank's board of directors to implement the provisions of this ORDER.
(b) The qualifications of management shall be assessed on its ability to:
(i) comply with the requirements of this ORDER;
(ii) operate the Bank in a safe and sound manner;
(iii) comply with applicable laws and regulations; and
(iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.
(c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Superintendent of Banks ("Superintendent") in writing when it proposes to add any individual to the Bank's board of directors or employ any individual as a senior executive officer. The notification must be received at least 30 days before such addition or employment is intended to become effective and should include a description of the background and experience of the individual or individuals to be added or employed.
(d) The Bank may not add any individual to its board of directors or employ any individual as a senior executive officer if the Regional Director issues a notice of disapproval pursuant to section 32 of the Act, 12 U.S.C. § 1831i.
[.2] 2. (a) During the life of this ORDER, the Bank shall maintain adjusted Tier 1 capital in such an amount as to equal or exceed seven (7.0) percent of the Bank's total assets. The level of adjusted Tier 1 capital to be maintained during the life of this ORDER shall be in addition to a fully funded loan loss reserve, the adequacy of which shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
(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
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(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 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 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 law. 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 noncumulative perpetual preferred stock, than 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 subscribed 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 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 consolidated assets classified "Loss" on pages 2-a-1 through 2-a-15 of the Report of Examination of the Bank as of August 12, 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 June 30, 1992, the Bank shall have reduced the consolidated assets classified "Substandard" on pages 2-a-1 through 2-a-15 of the Report of Examination of the Bank as of August 12, 1991 that have not previously been charged off to not more than $9,750,000.
(c) By September 30, 1992, the Bank shall have reduced the consolidated assets classified "Substandard" on pages 2-a-1 through 2-a-15 of the Report of Examination of the Bank as of August 12, 1991 that have not previously been charged off to not more than $7,750,000.
(d) By December 31, 1992, the Bank shall have reduced the consolidated assets classified "Substandard" on pages 2-a-1 through 2-a-15 of the Report of Examination of the Bank as of August 12, 1991
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and have not previously been charged off to not more than $6,000,000.
(e) By March 31, 1993, the Bank shall have reduced the consolidated assets classified "Substandard" on pages 2-a-1 through 2-a-15 of the Report of Examination of the Bank as of August 12, 1991 that have not previously been charged off to not more than $3,000,000.
(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) 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 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. (a) Within 30 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 revisions shall, at a minimum, address and eliminate all of the deficiencies noted in the Report of Examination as of August 12, 1991. 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) Revisions to the Bank's loan policies and practices, required by this paragraph, at a minimum shall include the following:
(i) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $100,000 which are classified "Substandard" as of August 12, 1991 or by the FDIC or the California State Banking Department in subsequent Reports of Examination and all other loans in excess of $100,000 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
(ii) the board of directors shall adopt procedures whereby officer compliance with the reviewed 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
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all members are present and the vote of each is noted.
[.6] 6. Within 60 days from the effective date of this ORDER, the Bank shall develop a written plan, approved by its board of directors and acceptable to the Regional Director and the Superintendent, and shall subsequently implement the plan to reduce all loan concentrations specified on pages 2-b and 2-b-1 of the Report of Examination of the Bank as of August 12, 1991. Implementation of the plan shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
[.7] 7. (a) During the life of this ORDER, the Bank shall maintain an adequate reserve for loan losses.
(b) Additionally, within 30 days from the effective date of this ORDER, the Bank shall submit to the Regional Director for review a revised 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 five (5) 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 non-accrual 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. Review and comment of said policy by the FDIC shall be forwarded to the Bank within 30 days of receipt of such policy. The policy shall be adopted and its implementation acceptable to the Regional Director as determined at subsequent examinations and/or visitations.
[.8] 8. Within 60 days from the effective date of this ORDER, the Bank shall adopt a written liquidation plan for all of its joint venture holdings. The plan shall require monthly reporting to and review by the board of directors with the results of such reviews noted in the board's minutes. The plan and its implementation shall be acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
[.9] 9. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and fully implement a written plan and a comprehensive budget for all categories of income and expense. The plan and budget required by this paragraph shall include formal goals and strategies, consistent with sound banking practices, to improve the Bank's net interest margin, increase interest income, reduce discretionary expenses, and improve and sustain earnings of the Bank. The plan shall include a description of the operating assumptions that form the basis for and adequately support, major projected income and expense components. Thereafter, the Bank shall formulate such a plan and budget by November 30 of each subsequent year.
(b) The plan and budget required by subparagraph 8(a) of this ORDER, upon completion, shall be submitted to the Regional Director and Superintendent for their review and opportunity for comment.
(c) Following the end of each calendar quarter, the board of directors shall evaluate the Bank's actual performance in relation to the plan and budget required by subparagraph 8(a) of this ORDER and shall record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors meeting at which such evaluation is undertaken.
[.10] 10. Within 90 days from the effective date of this ORDER, the Bank shall obtain current real estate appraisals, prepared by qualified appraisers for all Other Real Estate and joint venture property interests. In addition, during the life of this ORDER and for as long as the Bank continues
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to hold joint venture property interests or Other Real Estate, the Bank shall maintain current appraisals for such assets. An appraisal will be deemed "current" in connection with this paragraph if it is less than one year old, unless an acceptable alternative had been agreed to in writing by the Regional Director and the Superintendent. Furthermore, within 30 days from receipt of the appraisals required by this paragraph, the Bank shall adjust its book value for the individual parcels of Other Real Estate and its interests in the joint venture properties to reflect the current appraised values.
[.11] 11. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a policy for accounting with respect to its subsidiaries which will eliminate and/or correct all of the deficiencies set forth on page 6-a-1 of the Report of Examination as of August 12, 1991. The policy and its implementation shall be acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
[.12] 12. 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 Tier 1 capital to total assets of the Bank will be not less than seven (7.0) percent 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 unreasonable with-held.
[.13] 13. During the life of this ORDER, the Bank shall not engage, directly or indirectly, in any additional real estate activities subject to section 751.3 of the California Financial Code, Cal. Fin. Code § 751.3 (West 1989), except with the prior written approval of the Regional Director and the Superintendent.
[.14] 14. Following the effective date of this ORDER, the Bank shall send to it 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.
[.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, and any institution-affiliated party as such term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), to include, 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 4th day of May, 1992.
Pursuant to delegated authority.
