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{{1-31-93 p.C-2827}}
   [10,666] In the Matter of Silvergate Thrift and Loan, La Mesa, California, Docket No. FDIC-92-320b (11-2-92).

   Thrift to cease and desist from such unsafe or unsound practices as operating with inadequate supervision by the board of directors; operating with inadequate management; operating with inadequate capital; operating with an excessive level of poor quality loans; following hazardous lending and lax collection practices; operating with undue concentrations of credit; operating in such a manner as to produce operating losses; and operating in violation of applicable laws or regulations.

   [.1] Board of Directors—Duties Specified
   [.2] Management—Qualifications—Review
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Lending and Collection Policy—Minimum Requirements
   [.6] Loan Loss Reserve—Establish/Maintain
   [.7] Loans—Concentrations of Credit—Risk Segmentation Analysis
   [.8] Profit Plan—Minimum Requirements
   [.9] Violations of Law—Eliminate/Correct
   [.10] Dividends—Restricted
   [.11] Investment Policy—Revision—Minimum Requirements
   [.12] Loan Portfolio—Review and Grading System Required
   [.13] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

SILVERGATE THRIFT AND LOAN
LA MESA, CALIFORNIA
(Insured State Nonmember Thrift)
ORDER
TO
CEASE AND DESIST

FDIC-92-320b

   Silvergate Thrift and Loan, La Mesa, California ("Thrift"), 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 Thrift 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 {{1-31-93 p.C-2828}}AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated October 26, 1992, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, the Thrift 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 Thrift 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 Thrift, 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 supervision by the board of directors;
   (b) operating with inadequate management;
   (c) operating with marginal equity capital in relation to the volume and quality of assets held by the Thrift;
   (d) operating with a large volume of poor quality loans;
   (e) following hazardous lending and lax collection practices;
   (f) operating with undue concentrations of credit in relation to the Thrift's capital account;
   (g) operating in such a manner as to produce operating losses; and
   (h) operating in violation of Part 323.4 of the FDIC Rules and Regulations, 12 C.F.R. § 323.4, as more fully described on page 6-b of the Report of Examination as of May 26, 1992.
   IT IS FURTHER ORDERED that the Thrift 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 Thrift, assuming full responsibility for the formulation of sound policies and objectives, the monitoring of compliance with established policies, and the supervision of all of the Thrift's activities.
   This participation shall include meetings to be held no less frequently than monthly, at which, at a minimum, the following areas are reviewed and approved: reports of income and expenses; new, overdue, renewal, insider, charged off, and recovered loans; investment activities; operating policies; and individual committee actions. Board minutes shall document these reviews and approvals, including the names of any dissenting directors.

   [.2] 2. The Thrift 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 Thrift. Management should include a chief executive officer with proven ability in managing a Thrift of comparable size, and experience in upgrading a low quality loan portfolio, 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 Thrift'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 Thrift in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
       (iv) restore all aspects of the Thrift to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.
   (c) During the life of this ORDER, the Thrift shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Commissioner of Corporations for the State of California ("Commissioner") in writing when it proposes to add any individual to the Thrift'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 {{1-31-93 p.C-2829}}and should include a description of the background and experience of the individual or individuals to be added or employed.
   (d) The Thrift 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) During the life of this ORDER, the Thrift shall maintain Tier 1 capital in such an amount as to equal or exceed eight and one-half (8.5) percent of the Thrift's total assets.
   (b) The Thrift shall maintain minimum risk-based capital requirements as described in the FDIC Statement of Policy on Risk-Based Capital contained in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, Appendix A.
   (c) The level of 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 Commissioner as determined at subsequent examinations and/or visitations.
   (d) 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, shareholders, and/or parent holding company; or
       (iv) any other means acceptable to the Regional Director and the Commissioner; 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 Thrift's loan loss reserves.
   (e) 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 Thrift's securities (including a distribution limited only to the Thrift's existing shareholders), the Thrift shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Thrift 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 Commissioner for prior approval.
   (f) In complying with the provisions of Paragraph 2 of this ORDER, the Thrift shall provide to any subscriber and/or purchaser of the Thrift'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 Thrift 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 Thrift's securities who received or was tendered the information contained in the Thrift's original offering materials.
   (g) For the purposes of this ORDER, the terms "Tier 1 capital" and "total as- {{1-31-93 p.C-2830}}sets" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. §&scet; 325.2(m) and 325.2(n), as amended at 56 Fed. Reg. 10154, effective April 10, 1991.

   [.4] 4. (a) Within 10 days from the effective date of this ORDER, the Thrift shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of May 26, 1992, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Thrift is not considered collection for the purpose of this paragraph.
   (b) Within 90 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" as of May 26, 1992 that have not previously been charged off to not more than $1,700,000.
   (c) Within 180 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" as of May 26, 1992 that have not previously been charged off to not more than $1,400,000.
   (d) Within 270 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" as of May 26, 1992 that have not previously been charged off to not more than $1,100,000.
   (e) Within 360 days from the effective date of this ORDER, the Thrift shall have reduced the assets classified "Substandard" as of May 26, 1992 that have not previously been charged off to not more than $900,000.
   (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 Thrift shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Thrift 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.

   [.5] 5. Within 60 days from the effective date of this ORDER, the Thrift shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Thrift's lending function. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.6] 6. Within 90 days from the effective date of this ORDER, the board of directors shall review the adequacy of the reserve for loan losses and establish 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 Thrift'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 under taken shall indicate the results of the review.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Thrift shall perform a risk segmentation analysis with respect to the Concentrations of Credit listed on page 2-b of the Report of Examination of the Thrift as of May 26, 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 Thrift's capital account. A copy of this analysis will be provided to the Regional Director and the board agrees to develop a plan to reduce any {{7-31-94 p.C-2831}}segment of the portfolio which the Regional Director deems to be an undue concentration of credit in relation to the Thrift's capital account. The plan and its implementation shall be in a form and manner 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 Thrift shall formulate and implement a written profit plan. This plan shall be forwarded to the Regional Director and to the Commissioner for review and comment and shall address, at a minimum, the following:
   (a) goals and strategies for improving and sustaining the earnings of the Thrift, including:

       (i) an identification of the major areas in, and means by which, the board of directors will seek to improve the Thrift's operating performance:
       (ii) realistic and comprehensive budgets;    (iii) a budget review process to monitor the income and expenses of the Thrift 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 Thrift's loan, investment, and operating policies, and budget and profit planning, with the funds management policy.
   [.9] 9. Within 60 days from the effective date of this ORDER, the Thrift shall eliminate and/or correct all violations of law which are more fully set out on page 6-b of the Report of Examination of the Thrift as of May 26, 1992. In addition, the Thrift shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.10] 10. The Thrift shall not pay cash dividends without the prior written consent of the Regional Director and the Commissioner.

   [.11] 11. Within 30 days from the effective date of this ORDER, the Thrift shall adopt and implement a comprehensive written investment policy. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.12] 12. Within 60 days from the effective date of this ORDER, the Thrift shall develop and adopt an internal loan grading system to assess the potential loss exposure in the loan portfolio. The internal loan grading system shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.13] 13. Following the effective date of this ORDER, the Thrift shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Thrift's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Thrift'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. 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 Thrift shall furnish written progress reports to the Regional Director and the Commissioner 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 Thrift's Report of Condition and the Thrift'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 Commissioner have released the Thrift in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Thrift, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Thrift.
   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 {{7-31-94 p.C-2832}}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 November, 1992.
   Pursuant to delegated authority.

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