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FDIC Enforcement Decisions and Orders

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{{6-30-95 p.C-2756}}
   [10,651] In the Matter of Capital Bank, Downey, California, Docket No. FDIC-92-296b (10-2-92).

   Bank to cease and desist from such unsafe or unsound practices as operating with unsatisfactory supervision by the board of directors; 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 unsatisfactory lending and lax collection practices; operating with inadequate liquidity and funds management policy; engaging in practices which produce inadequate earnings. This order was terminated by order of the FDIC dated 4-11-95. See ¶15,992.

   [.1] Board of Directors—Duties—Meetings—Frequency
   [.2] Management—Qualifications—Review
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Loans—Special Mention—Eliminate
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Lending and Collection Policy—Minimum Requirements
   [.8] Loans—Concentrations of Credit—Risk Segmentation Analysis Required
   [.9] Loan Loss Reserve—Establish/Maintain
   [.10] Real Estate—Appraisal Required
{{12-31-92 p.C-2757}}
   [.11] Profit Plan—Minimum Requirements
   [.12] Strategic Plan—Preparation Required
   [.13] Funds Management—Written Policy—Minimum Requirements
   [.14] Bank Insiders—Transactions With—Written Policy Required
   [.15] Dividends—Restricted
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Real Estate Activities—Compliance With State Law Required

In the Matter of

CAPITAL BANK
DOWNEY, CALIFORNIA
(Insured State Nonmember Bank)
ORDER
TO
CEASE AND DESIST

FDIC-92-296b

   Capital Bank, Downey, California ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated September 30, 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 unsatisfactory supervision by the board of directors;
   (b) operating with unsatisfactory management;
   (c) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Bank;
   (d) operating with a large volume of adversely classified loans;
   (e) operating with an inadequate loan valuation reserve;
   (f) following unsatisfactory lending and lax collection practices;
   (g) operating with inadequate provisions for liquidity and funds management; and
   (h) operating in such a manner as to produce inadequate earnings.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. Within 30 days from the effective date of this ORDER, the board of directors shall increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank's activities, consistent with the role and expertise commonly expected for directors of Banks of comparable size. This participation shall include meetings to be held no less frequently than monthly at which, at a minimum, the following areas shall be reviewed and approved: reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity; operating policies; and individual committee actions. Board minutes shall document these reviews and approvals, including the names of any dissenting directors.

   [.2] 2. 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 {{12-31-92 p.C-2758}}with proven ability in managing a Bank of comparable size, and demonstrate the ability to upgrade a low quality loan portfolio, improve earnings and correct 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/ 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 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.

[.3] 3. (a) On or before December 31, 1992, the Bank shall increase Tier 1 capital by no less than $700,000, and shall have Tier 1 capital in such an amount as to equal or exceed seven and one-half (7.5) 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 seven and one-half (7.5) percent of the Bank's total assets.
   (b) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraph 3(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 3 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) 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 3 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 3 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 {{12-31-92 p.C-2759}}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 3 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 to 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.

[.4] 4. (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 27, 1992, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   (b) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of May 27, 1992 that have not previously been charged off to not more than $11,000,000.
   (c) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of May 27, 1992 that have not previously been charged off to not more than $8,000,000.
   (d) Within 540 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of May 27, 1992 that have not previously been charged off to not more than $6,800,000.
   (e) The requirements of subparagraphs 4(a), 4(b), 4(c), and 4(d) 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 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 adversely classified to warrant removing any adverse classification, as determined by the FDIC.

   [.5] 5. Within 360 days from the effective date of this ORDER, the Bank shall completely eliminate the asset listed for "Special Mention" as of May 27, 1992. As used in this paragraph, the word "eliminate" means:
       (a) to collect;
       (b) to charge-off; or
       (c) to sufficiently correct the deficiencies in the management of those assets to warrant removing such designation as determined by the FDIC.

[.6] 6. (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.
{{12-31-92 p.C-2760}}
   (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" without the prior approval of a majority of the board of directors or the loan committee of the Bank. Subparagraph 6(b) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with FASB 15, providing that such renewal or extension shall be made only with the prior approval of a majority of the board of directors or the loan committee of the Bank.

[.7] 7. (a) Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Bank's lending function, which policies shall include specific guidelines for placing loans on a non-accrual basis. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
   (b) The initial revisions to the Bank's loan policy and practices, required by this paragraph, at a minimum, shall include the following:

       (i) provisions which require complete loan documentation, realistic repayment terms and current credit information adequate to support the outstanding indebtedness of the borrower. Such documentation shall include current financial information, profit and loss statements or copies of tax returns and cash flow projections;
       (ii) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values;
       (iii) provisions which provide guidelines for the approval of renewals and/or extensions of loans. At a minimum, such provisions shall require analysis of the borrowers financial condition and payment ability, past payment performance and any other factors necessary for a prudent credit decision;
       (iv) provisions which specify the circumstances and conditions under which real estate appraisals must be conducted by an independent third party;
       (v) provisions which establish officer lending limits;
       (vi) provisions that require extensions of credit to any of the Bank's executive officers, directors, or principal shareholders, or to any related interest of such persons, to be approved in advance by a majority of the entire board of directors in accordance with section 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(b);
       (vii) provisions that directors first determine that the lending staff has the expertise to properly supervise construction loans and that adequate procedures are in place to monitor any construction involved before funds are disbursed;
       (viii) provisions which prohibit concentration of credit in excess of 25 percent of the Bank's total equity capital and reserves to any borrower and that borrower's related interests;
       (ix) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans which are classified "Substandard" as of May 27, 1992 or by the FDIC or State Banking Department in subsequent Reports of Examination and all other loans which warrant individual review and consideration by the board of directors as determined by the loan committee or active management. The loan "watch list" shall be presented to the board of directors for review at least monthly with such review noted in the minutes; and
       (x) the board of directors shall adopt procedures whereby officer compliance with the revised loan policy is monitored and responsibility for exceptions thereto assigned. The procedures adopted shall be reflected in minutes of a board of directors meeting at which all members are present and the vote of each is noted.

   [.8] 8. Within 90 days from the effective date of this ORDER, the Bank shall perform a risk segmentation analysis with respect to {{12-31-92 p.C-2761}}the Concentrations of Credit listed on pages 2-b and 2-b-1 of the Report of Examination of the Bank as of May 27, 1992. Concentrations should be identified by product type, geographic distribution, underlying collateral or other asset groups which are considered economically related and in the aggregate represent a large portion of the Bank's capital account. The plan and its implementation shall be acceptable to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

    [.9] 9. (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 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 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. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.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 each parcel of Other Real Estate. In addition, during the life of this ORDER and for as long as the Bank continues to hold 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 has 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 to reflect the current appraised values.

   [.11] 11. 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 the 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.

   [.12] 12. Within 120 days of the effective date of this ORDER, the Bank shall develop and submit to the Regional Director and Superintendent a written three-year strategic plan. Such plan shall include specific goals for the dollar volume of total loans, total investment securities, and total deposits as of December 31, 1993, December 31, 1994, and December 31, 1995. For each time frame, the plan will also specify the {{12-31-92 p.C-2762}}anticipated average maturity and average yield on loans and securities; the average maturity and average costs of deposits; the level of earning assets as a percentage of total assets; and the ratio of net interest income to average earning assets. The plan shall be in a form and manner acceptable to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

   [.13] 13. Within 60 days from the effective date of this ORDER, the board of directors shall revise adopt and implement a policy for the operation of the Bank in such a manner as to provide adequate funds management consistent with safe and sound banking practices. At a minimum, the policy shall establish acceptable ranges for the Bank's rate sensitivity and gap ratios. In addition, the policy shall establish the Bank's volatile liability dependency ratio to not more than four and one-half (4.5) percent and maintain a liquidity ratio of at least twenty (20.0) percent as calculated by the FDIC in its Reports of Examination. The requirements of this paragraph shall not be construed as standards for future operations, and the Bank's volatile liability dependency ratio and liquidity ratio shall be maintained at a level consistent with prudent banking practices.

   [.14] 14. Within 60 days from the effective date of this ORDER the Bank shall develop, adopt and implement a policy which governs the relationship between the Bank and the Bank's insiders and their related interests. At a minimum, such policy shall include provisions which address the transactions involving director Gary Almas, Almaron Corporation and Bri-Krist Building Corporation as more fully discussed on page 1-a-2 of the FDIC Report of Examination of the Bank as of May 27, 1992. 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.

   [.15] 15. The Bank shall not pay cash dividends without the prior written consent of the Regional Director and the Superintendent.

   [.16] 16. Following the effective ate 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.

   [.17] 17. 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.
   18. 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 2nd day of October, 1992.
   Pursuant to delegated authority.

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