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FDIC Enforcement Decisions and Orders

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{{8-31-92 p.C-2402}}
   [10,566] In the Matter of Community Bank, Pasadena, California, Docket No. FDIC-92-189b (6-15-92).

   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 without adequate reserve for loan losses; following lax lending and collection practices; operating with inadequate provisions for liquidity and funds management; operating without proper internal routine and controls; and operating in violation of applicable laws or regulations.

   [.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] Lending and Collection Policy—Minimum Requirements
   [.7] Loan Loss Reserve—Establish/Maintain
   [.8] Violations of Law—Eliminate/Correct
   [.9] Asset/Liability Management—Written Policy—Minimum Requirements
   [.10] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.11] Investments—Joint Ventures—Written Policy Required
   [.12] Dividends—Restricted
   [.13] Loans—Concentrations of Credit—Reduction Plan
   [.14] Reports of Condition and Income—Amendment Required
   [.15] Shareholders—Disclosure—Cease and Desist Order
   [.16] Compliance Reports—Frequency

{{8-31-92 p.C-2403}}

In the Matter of

COMMUNITY BANK
PASADENA, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-189b

   Community Bank, Pasadena, 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 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 June 15, 1992, 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, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER").
   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. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, and any institution-affiliated party as such term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices and violations:
   (a) operating with inadequate management;
   (b) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Bank;
   (c) operating with a large volume of poor quality assets;
   (d) operating with an inadequate loan valuation reserve;
   (e) following lax lending and/or collection practices;
   (f) operating with inadequate provisions for liquidity and funds management;
   (g) operating with inadequate routine and controls policies;
   (h) operating in alleged violation of section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, made applicable to state nonmember insured institutions by section 18(j)(1) of the Act, 12 U.S.C. § 1828(j)(1); section 215.4(a) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(a), made applicable to state nonmember institutions by section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2); and section 1201 of the California Financial Code, all as more fully described on pages 6-b and 6-b-1 of the Report of Examination of the Bank as of September 9, 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 a Chief Executive Officer; within 150 days from the effective date of this ORDER the Bank shall employ a Senior Loan Officer and thereafter 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 financial institution and experience in upgrading low quality assets. Management should also include a senior lending officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Bank's loans. Each member of management shall be provided appropriate written authority from the Bank's board of directors to implement the provisions of this ORDER.
       (b) The qualifications of management shall be assessed on its ability to:
         (i) comply with the requirements of this ORDER;
         (ii) operate the Bank in a safe and sound manner;
         (iii) comply with applicable laws; and
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         (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.
       (c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Superintendent of Banks for the State of California ("Superintendent") in writing when it proposes to add any individual to the Bank's board of directors or employ any individual as a senior executive officer. The notification must be received at least 30 days before such addition or employment is intended to become effective and should include a description of the background and experience of the individual or individuals to be added or employed.
       (d) The Bank may not add any individual to its board of directors or employ any individual as a senior executive officer if the Regional Director issues a notice of disapproval pursuant to section 32 of the Act, 12 U.S.C. § 1831i.

[.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 six and one half (6.5) percent of the Bank's total assets.
   (b) The level of adjusted Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraph 2(a) shall be in addition to a fully funded loan loss reserve, the adequacy of which shall be satisfactory to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.
   (c) 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.
   (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 their dissemination. If the increase in Tier 1 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.
   (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 re- {{8-31-92 p.C-2405}}ceived 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 meaning ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. §§ 325.2(m) and 325.2(n).

[.3] 3. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" and one-half of the assets classified "Doubtful" as of September 9, 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) On or before October 10, 1992, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of September 9, 1991 that have not previously been charged off to not more than $90,000,000.
   (c) On or before February 10, 1993, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of September 9, 1991 that have not previously been charged off to not more than $80,000,000.
   (d) On or before June 10, 1993, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of September 9, 1991 that have not previously been charged off to not more than $70,000,000.
   (e) On or before October 10, 1993, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of September 9, 1991 that have not previously been charged off to not more than $60,000,000.
   (f) On or before February 10, 1994, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of September 9, 1991 that have not previously been charged off to not more than $40,000,000.
   (g) The requirements of subparagraphs 3(a), 3(b), 3(c), 3(d), 3(e) and 3(f) of this ORDER are not to be construed as standards for future operations. In addition, 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) and 3(g) 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) On or before October 10, 1992, the Bank shall have reduced the assets listed for "Special Mention" as of September 9, 1991, to not more than $32,000,000.
   (b) On or before February 10, 1993, the Bank shall have reduced the assets listed for "Special Mention" as of September 9, 1991, to not more than $21,000,000.
   (c) On or before June 10, 1993, the Bank shall have reduced the assets listed for "Special Mention" as of September 9, 1991, to not more than $13,000,000.
   (d) On or before October 10, 1993, the Bank shall have reduced the assets listed for "Special Mention" as of September 9, 1991, to not more than $12,000,000.
   (e) On or before February 10, 1994, the Bank shall have reduced the assets listed for "Special Mention" as of September 9, 1991, to not more than $11,000,000.
   (f) As used in subparagraph 4(a), 4(b), 4(c), 4(d), and 4(e), the word "reduce" means:
       (i) to collect;
       (ii) to charge-off; or
       (iii) to sufficiently improve the quality of assets listed for Special Mention to warrant removing such designation, as determined by the FDIC.

[.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 {{8-31-92 p.C-2406}}borrower) any credit already extended to any borrower.
   (b) 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 classified, in whole or part, "Substandard" or "Doubtful."
   (c) The immediately preceding paragraph 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) Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Bank's lending function. Such policies, at a minimum, shall include:

       (i) Provisions which address and eliminate all areas of deficiency in the Bank's current loan policy as cited in FDIC Report of Examination as of September 9, 1991;
       (ii) Provisions which require the development and implementation of a reliable internal system of problem loan identification; and
       (iii) Provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $1,000,000 which are classified "Substandard" and "Doubtful" as of September 9, 1991 or by the FDIC or the State Banking Department in subsequent Reports of Examination and all other loans in excess of $1,000,000 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.
   (b) The board of directors shall also 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.
The revised 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.

   [.7] 7. During the life of this ORDER, the Bank shall maintain an adequate reserve for loan losses.
   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 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. {{1-31-95 p.C-2407}}
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 the Superintendent as determined at subsequent examinations and/or visitations.

   [.8] 8. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all alleged violations of law which are more fully set out on pages 6-b and 6-b-1 of the Report of Examination of the Bank as of September 9, 1991. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

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

       (i) establishing a range for the Bank's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination, and which ratio shall, within 120 days from the effective date of this ORDER, be reduced to not more than forty (40.0) percent, within 240 days from the effective date of this ORDER, be reduced to not more than thirty-five (35.0) percent, and within 360 days from the effective date of this ORDER, be reduced to not more than thirty (30.0) percent. The requirements of this paragraph shall not be construed as standards for future operations, and the Bank's volatile liability dependency ratio shall be maintained at a level consistent with prudent banking practices;
       (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 and gap ratios; and
       (v) 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.
The revised 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.

   [.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall adopt the 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 establish, at a minimum, procedures which will address and eliminate all areas of deficiencies listed on pages 6-c through 6-c-3 in the FDIC's Report of Examination dated September 9, 1991. The policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.11] 11. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt and implement a policy to provide effective procedures and controls over the Bank's existing joint venture investments. The policy shall establish, at a minimum, procedures which will address and eliminate all areas of criticism in the Bank's current joint venture activities as more fully described in the Report of Examination of the Bank as of September 9, 1991. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.12] 12. 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 six and one half (6.5) 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
{{1-31-95 p.C-2408}}
       (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.

   [.13] 13. Within 60 days from the effective date of this ORDER, the Bank shall develop and submit to the Regional Director and the Superintendent, for their approval, a written plan, approved by the board of directors, for systematically reducing the loan concentration listed on page 2-c in the FDIC Report of Examination as of September 9, 1991. Implementation of the plan shall be acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
   14. During the life of this ORDER, the Bank shall not engage, directly or indirectly, in an addition activities subject to section 751.3 of the California Financial Code, Cal. Fin. Code § 751.3 (West 1989), without the prior written consent of the Regional Director and the Superintendent.

   [.14] 15. 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 Banking or FDIC examination of the Bank during that reporting period.

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

   [.16] 17. Within 30 days of the end of the first quarter following the effective date of this ORDER, and within thirty days of the end of each quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Superintendent detailing any actions taken to secure compliance with this ORDER and the results thereof. Such reports shall include a copy of the Bank's last 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 has 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.
   The 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, terminate, suspended, or set aside by the FDIC.
   Dated at San Francisco, California, this 19th day of June, 1992.
   Pursuant to delegated authority.

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