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FDIC Enforcement Decisions and Orders

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{{7-31-93 p.C-3209}}
   [10,799] In the Matter of Wilshire State Bank, Los Angeles, California, Docket No. FDIC-93-101b (5-14-93).

   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 loans; operating with inadequate allowance for loan and lease losses; following hazardous lending and lax collection practices; operating with inadequate liquidity; operating without proper internal routine and controls; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 9-27-95. See ¶16,041.)

   [.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] Loan Loss Reserve—Establish/Maintain
   [.7] Appraisals—Written Policy Required
   [.8] Audit—Insider Transactions
   [.9] Conflicts of Interest—Written Policy Required
{{7-31-93 p.C-3209}}
   [.10] Assets—Average Assets—Limitation on Increase
   [.11] Bank Operations—Overhead and Expenses—Control
   [.12] Violations of law—Eliminate/Correct
   [.13] Asset/Liability Management—Written Policy—Minimum Requirements
   [.14] Dividends—Restricted
   [.15] Compensation—Officers—Review Required
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Real Estate Activities—Compliance with State Law Required

In the Matter of

WILSHIRE STATE BANK
LOS ANGELES, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-93-101b

   Wilshire State Bank, Los Angeles, 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 and/or regulations 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 May 11, 1993, 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 and/or regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had committed violations of law and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, and any institution-affiliated party as such term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices and violations:
   (a) operating with inadequate management;
   (b) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Bank;
   (c) operating with a large volume of poor quality loans;
   (d) operating with an inadequate loan valuation reserve;
   (e) following hazardous lending and lax collection practices;
   (f) operating with inadequate provisions for liquidity and funds management;
   (g) operating with inadequate routine and controls policies; and
   (h) operating in 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), as more fully described on pages 6-a-5 through 6-a-8 of the Report of Examination as of October 5, 1992; section 22(h) of the Federal Reserve Act, as amended, 12 U.S.C. § 375b, as more fully described on page 6-a of the Report of Examination as of October 5, 1992; sections 215.4(a), 215.4(b), 215.4(c), 215.4(d), 215.6, and 215.8 of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.4(a), 215.4(b), 215.4(c), 215.4(d), 215.6, and 215.8, made applicable to state nonmember institutions by section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2), as more fully described on pages 6-a through 6-a-5, 6-a-10, and 6-a-11 of the Report of Examinations as of October 5, 1992; Part 323 of the FDIC Rules and Regulations, 12 C.F.R. Part 323, {{7-31-93 p.C-3210}}as more fully described on pages 6-a-9 and 6-a-10 of the Report of Examination as of October 5, 1992; and sections 1221, 3372.5 and 3354(b) of the California Financial Code, as more fully described on page 6-a-8 of the Report of Examination as of October 5, 1992.
   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 senior management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. Senior management should include a chief executive officer with proven ability in managing a Bank of comparable size, and experience in upgrading a low quality loan portfolio, improving earnings, and other matters needing particular attention. Senior 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 senior 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 senior 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 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) The Bank shall increase Tier 1 capital by an amount as to equal or exceed six and three quarters (6.75) percent of the Bank's total assets by September 30, 1993, and in an amount as to equal or exceed seven (7.0) percent of the Bank's total assets by January 31, 1994. Thereafter, during the life of this ORDER, the Bank shall maintain Tier 1 capital in such an amount as to equal or exceed seven (7.0) percent of the Bank's total assets.
   (b) Within 60 days from the effective date of this ORDER, the Bank shall develop and adopt a plan to meet the 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. The Plan shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations.
   (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 Superintendent 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 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 {{7-31-93 p.C-3211}}of this ORDER may not be accomplished through a deduction from the Bank's loan loss reserves without prior approval of the Regional Director.
   (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 favour 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, 550 - 17th Street, N.W., 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.
   (f) In complying with the provisions of Paragraph 2 of this ORDER, during the pendency of any public offering, 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 in compliance with applicable securities laws and as soon as practicable after 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.
   (g) For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. §§ 325.2(m) and 325.2(n), as amended at 56 Fed. Reg. 10154, effective April 10, 1991.

[.3] 3. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" and one-half of the assets classified "Doubtful" as of October 5, 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" and those assets classified "Doubtful" as of October 5, 1992 that have not previously been charged off to not more than $8,500,000.
   (c) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of October 5, 1992 that have not previously been charged off to not more than $6,500,000.
   (d) The requirements of subparagraphs 3(a), 3(b), and 3(c) 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 unless such loan proceeds are pursuant to subparagraph 3(d)(iii). As used in subparagraphs 3(b), 3(c), and 3(d) the word "reduce" means:

       (i) to collect;
    {{7-31-93 p.C-3212}}
       (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. Following the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Doubtful," "Substandard," or "Loss" and is uncollected unless the board of directors has signed a detailed written statement giving reasons why failure to extend such credit would be detrimental to the best interests of the Bank. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.

[.5] 5. (a) Within 90 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 make every effort to 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 address all items of criticism contained within the October 5, 1992 Report of Examination on page 6-1;
       (ii) provisions, consistent with FDIC instructions for the preparation of Reports of Condition and Income, under which the accrual of interest income is discontinued and previously accrued interest is reversed on delinquent loans;
       (iii) provisions which prohibit the capitalization of interest or loan related expense unless the board of directors supports in writing and records in the minutes of the corresponding board of directors meeting why an exception thereto is in the best interests of the Bank;
       (iv) 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;
       (v) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values;
       (vi) provisions which establish standards for unsecured credit;
       (vii) provisions which establish officer lending limits;
       (viii) 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);
       (ix) provisions which prohibit the issuance of standby letters of credit unless the letters of credit are fully secured by readily marketable collateral and/or are supported by current and complete financial information;
       (x) provisions that directors first determine that the lending staff has the expertise necessary to properly supervise trade finance loans and that adequate procedures are in place to perfect, evaluate, and monitor the Bank's collateral position before funds are disbursed;
       (xi) provisions which prohibit concentrations of credit in excess of 25 percent of the Bank's total equity capital and reserves to any borrower and that borrower's related interest;
       (xii) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $150,000 which are classified "Substandard" and "Doubtful" as of October 5, 1992 or by the FDIC or California State Banking Department in subsequent Reports of Ex- {{7-31-93 p.C-3213}}amination, all other loans in excess of $200,000 which warrant individual review and consideration by the board of directors as determined by the loan committee or active management, as well as a status report on all Owned Real Estate ("ORE") properties. The loan "watch list" and ORE status report shall be presented to the board of directors for review at least monthly with such review noted in the minutes; and
       (xiii) 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.

   [.6] 6. Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter 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. Upon completion of the review, the Bank shall increase and maintain its loss reserve consistent with the loan loss reserve policy established. Such policy and its implementation shall be satisfactory to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt and implement written appraisal policies and practices. Such policies and practices shall be in compliance with the minimum standards set forth in Part 323 of the FDIC Rules and Regulations, 12 C.F.R. § 323. The policies and practices and their implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent.

   [.8] 8. Within 10 days from the effective date of this ORDER, the Bank shall cause to have an independent audit conducted of all insider transactions specifically referenced on pages 1 through 1-a-4 of the Report of Examination as of October 5, 1992. The results of the audit shall be reported in writing to the Bank which shall promptly furnish copies of the report to the Regional Director and the Superintendent.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt and implement a comprehensive conflicts of interest policy. At a minimum such policy must establish specific guidelines for officers and directors of the Bank regarding conflicts of interests and specifically respond to any recommendations made in the audit report received pursuant to Paragraph 8 of this ORDER. The policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent.

   [.10] 10. During the life of this ORDER, the Bank shall not increase its average assets from the October 5, 1992 level by an amount that would result in a violation of the capital requirements set forth in Paragraph 2 of this ORDER. Average asset size of the Bank for purpose of compliance with this Paragraph shall be computed in accordance with the instructions for Reports of Condition and Income.

   [.11] 11. Within 90 days from the effective date of this ORDER, the Bank shall develop and adopt a plan to control overhead and other expenses and restore the Bank's profitability. The plan shall be in a form and manner acceptable to the Regional {{7-31-93 p.C-3214}}Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.12] 12. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law, to the extent legally possible, which are more fully set out on pages 6-a through 6-a-11 of the Report of Examination of the Bank as of October 5, 1992, except for the violations of law relating to the Duk Kim property, more fully set out on pages 6-a-5 through 6-a-7, which the Bank shall eliminate and/or correct as soon as practicable. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.13] 13. Within 60 days from the effective date of this ORDER, the board of directors shall implement an asset/liability management policy which establishes a range for the Bank's volatile liability dependency ratio, as computed by the FDIC in its Report of Examination, and which ratio shall, within 180 days from the effective date of this ORDER, be reduced to not more than eighteen (18.0) percent; and within 240 days from the effective date of this ORDER, be reduced to not more than twelve (12.0) percent. Such policy shall take into account off-balance sheet commitments. Such policy shall also contain provisions setting appropriate parameters for the relationship between rate sensitive assets to rate sensitive liabilities within a range acceptable to the FDIC. The policy shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations. 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.

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

   [.15] 15. Within 180 days from the effective date of this ORDER, the Bank shall adopt an employee compensation plan after undertaking a review of compensation paid to any of the Bank's executive officers. At a minimum, the review shall include the following:

       (a) a critical analysis of each individual's background, experience, duties and responsibilities, and an appraisal of each individual's performance compared to the present level of compensation;
       (b) a comparison of each officer's total compensation with compensation received by officers with similar responsibilities in similar institutions; and
       (c) a determination of whether present executive officers are capable of implementing board directives and policies, operating within the constraints of laws and regulations, and operating the Bank in a prudent manner.
       For the purposes of this paragraph, "compensation" refers to any and all salaries, bonuses, and other benefits of every kind and nature whatsoever, whether paid directly or indirectly. The compensation plan and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.16] 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. The description and any accompanying communication, statement, or notice shall be send to the FDIC, Registration and Disclosure Section, 550 - 17th Street, N.W., 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.

   [.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 {{8-31-94 p.C-3215}}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 14th day of May, 1993.
   Pursuant to delegated authority.

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