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FDIC Enforcement Decisions and Orders

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{{8-31-95 p.C-3408}}
   [10,869] In the Matter of Foothill Bank, Mountain View, California, Docket No. FDIC-93-183b (8-31-93).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate capital; operating with less than satisfactory management; and operating in such a manner as to produce net losses. (This order was terminated by order of the FDIC dated June 22, 1995. See ¶16,014.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Lending and Collection Policy—Minimum Requirements
   [.6] Loans—Concentrations of Credit—Reduction Plan
   [.7] Loan Loss Reserve—Establish/Maintain
   [.8] Profit Plan—Minimum Requirements
   [.9] Bank Holding Company—Relationships With—Written Policy
   [.10] Sale or Merger of Bank—Plan to Facilitate Required
   [.11] Dividends—Restricted
   [.13] Funds Management—Large CD's—Reduce Reliance
   [.14] Capital—Capital Distribution—Restricted
   [.15] Compensation—To Management/Owners—Restricted
   [.16] Capital—Capital Restoration Plan
   [.17] Assets—Total Assets—Increase Limited
   [.18] Bank Expansion—Restricted
   [.19] Interest Rates—Liabilities—Payments Limited

In the Matter of
FOOTHILL BANK
MOUNTAIN VIEW, CALIFORNIA
(INSURED STATE NONMEMBER
BANK)
ORDER TO CEASE AND DESIST
FDIC-93-183b

   Foothill Bank, Mountain View, 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 August 30, 1993, 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 {{10-31-93 p.C-3409}}the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, and any institution-affiliated party as such term is defined in Section 3 (u) of the Act, 12 U.S.C. 1813 (u), cease and desist from the following unsafe or unsound banking practices:
   (a) operating with inadequate equity capital in relation to the volume and quality of assets held by the Bank;
   (b) operating with less than satisfactory management; and
   (c) operating in such a manner as to produce net losses in 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 management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. Management should include a chief executive officer with proven ability in managing a Bank of comparable size, 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 Bank's board of directors to implement the provisions of this ORDER.
   (b) The qualifications of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER;
       (ii) operate the Bank in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
       (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.
   (c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Superintendent of Banks 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) Within 240 days from the effective date of this ORDER, the Bank shall achieve Tier 1 capital in such an amount as to equal or exceed seven (7.0) 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 (7.0) 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 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, shareholders, and/or parent holding company; or
       (iv) any other means, including earnings, acceptable to the Regional Director and the Superintendent; or
       (v) any combination of the above means.
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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, 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.
   (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 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 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" as of December 15, 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 90 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of December 15, 1992 that have not previously been charged off to not more than $3,000,000.
   (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of December 15, 1992 that have not previously been charged off to not more than $2,500,000.
   (d) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of December 15, 1992 that have not previously been charged off to not more than $2,000,000.
   (e) The requirements of Subparagraphs 3(a), 3(b), 3(c), and 3(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 3(b), 3(c), and 3(d) the word "reduce" means:

       (i) to collect;
       (ii) to charge-off; or
       (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.

   [.4] 4. (a) Beginning with the effective date of the ORDER, the Bank shall not extend, directly or indirectly, any additional {{10-31-93 p.C-3411}}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. Subparagraph 4(a) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with the Financial Accounting Standards Board Statement Number 15 ("FASB 15").
   (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 written approval of a majority of the board of directors or the loan committee of the Bank.

   [.5] 5. Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policy to provide effective guidance and control over the Bank's lending function, which policy shall, at a minimum, address the deficiencies listed on page 6 of the FDIC Report of Examination of the Bank as of December 15, 1992 and specifically include guidelines for unsecured loans and limits on loan types. Such policy shall be submitted to the Regional Director and Superintendent for review and comment 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.

   [.6] 6. Within 90 days from the effective date of this ORDER, the board agrees to develop and implement a plan to reduce the concentrations of credit in relation to Tier 1 capital as listed on Page 2-b of the FDIC Report of Examination of the Bank as of December 15, 1992. The plan shall be submitted to the Regional Director and Superintendent for review and comment 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.
   Within 30 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 no later than thirty (30) days after 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.

   [.8] 8. 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 and 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.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall de- {{10-31-93 p.C-3412}}velop, adopt, and implement a written policy satisfactory to the Regional Director and the Superintendent, which policy shall govern the relationship between the Bank and its holding company, and shall limit the payment of any management, consulting, or other fees or funds of any nature, directly or indirectly, to or for the benefit of the Bank's holding company to only those fees or funds paid in connection with services performed by the Bank's holding company on behalf of or for the benefit of the Bank.

[.10] 10. Within 160 days from the effective date of this ORDER, the board of directors shall develop a plan to assist and facilitate the Shareholder's efforts to sell or merge the Bank. The plan may incorporate the Shareholder's plan to sell or merge the Bank and shall be in a form and manner acceptable to the Regional Director and the Superintendent.

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

[.12] 12. During the life of this ORDER, the Bank shall not accept, renew or rollover brokered deposits without the prior written consent of the Regional Director and the Superintendent. For purposes of this ORDER, brokered deposits are defined as described in Section 337.6 of the FDIC Rules and Regulations to include any deposits funded by third party agents or nominees for depositors, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or asserts a right to federal deposit insurance.

[.13] 13. Within 60 days from the effective date of this ORDER, the Bank shall develop and implement a plan to reduce its cost of funds and minimize reliance on certificates of deposit of $90,000 and over. The plan shall be submitted to the Regional Director and Superintendent for review and comment and its implementation shall be in a form and manner acceptable to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

[.14] 14 (a)The Bank shall make no capital distribution if, after making the distribution, the Bank would be undercapitalized. The Bank shall be considered to be undercapitalized if it fails to meet the FDIC's required minimum level for any relevant capital measure.
   (b) Notwithstanding Paragraph 14(a), the Bank may, with the prior written approval of the FDIC, repurchase, redeem, retire, or otherwise acquire shares or ownership interests if the repurchase, redemption, retirement, or other acquisition: (i) is made in connection with the issuance of additional shares or obligations of the Bank in at least an equivalent amount; and (ii) will reduce the Bank's financial obligations or otherwise improve the Bank's financial condition.
   (c) For purposes of this Paragraph, the term "capital distribution" means: (i) a distribution of cash or other property by the Bank to its owners made on account of that ownership, but not including any dividend consisting only of shares of the Bank or rights to purchase such shares or any amount paid on the deposits of a mutual or cooperative institution that the FDIC determines is not a distribution for purposes of this Paragraph; (ii) a payment by the Bank to repurchase, redeem, retire, or otherwise acquire any of its shares or other ownership interests, including any extension of credit to finance an affiliated company's acquisition of those shares or interests; or (iii) a transaction that the FDIC determines, by order or regulation, to be in substance a distribution of capital to the owners of the Bank.

   [.15] 15. The Bank shall pay no management fee to any person having control of the Bank if, after making the payment, the Bank would be undercapitalized. The Bank shall be considered to be undercapitalized if it fails to meet the FDIC's required minimum level for any relevant capital measure.

   [.16] 16. (a) If the Bank becomes undercapitalized by failing to meet the FDIC's required minimum level for any relevant capital measure, the Bank shall submit to the FDIC and Superintendent an acceptable capital restoration plan not later than 45 days after the Bank becomes undercapitalized.
   (b) The capital restoration plan referred to in Paragraph 16(a) shall: (i) specify the steps the Bank will take to become adequately capitalized; the levels of capital to be attained during each year in which the plan will be in effect; how the Bank will comply with the restrictions or requirements then in effect under Section 38 of the Federal Deposit Insurance Act; and the types and levels of activities in which the Bank will engage; and (ii) contain such other information as the FDIC may require.
{{12-31-94 p.C-3413}}
   (c) The FDIC shall consider and act on the capital restoration plan according to the pertinent time frames set forth by FDIC regulation; however, the FDIC shall not accept the capital restoration plan submitted by the Bank under Paragraph 16 unless: (i) the Bank's capital restoration plan complies with all requirements of Paragraph 16(b); the Bank's capital restoration plan is based on realistic assumptions, and is likely to succeed in restoring the Bank's capital; and the Bank's capital restoration plan would not appreciably increase the risk (including credit risk, interest-rate risk, and other types of risk) to which the Bank is exposed; and (ii) each company having control of the Bank has guaranteed that the Bank will comply with the capital restoration plan until the Bank has been adequately capitalized on average during each of 4 consecutive calendar quarters; and provided appropriate assurances of performance.
   (d) The aggregate liability under Paragraph 16(c)(ii) of all companies having control of the Bank shall be the lesser of: (i) an amount equal to 5 percent of the Bank's total assets at the time the Bank became undercapitalized; or (ii) the amount which is necessary (or would have been necessary) to bring the Bank into compliance with all capital standards applicable with respect to such Bank as of the time the Bank fails to comply with a plan under this subsection.
   (e) Paragraph 16 may not be construed as: (i) requiring any company not having control of the Bank to guarantee, or otherwise be liable on, a capital restoration plan; (ii) requiring any person other than the Bank to submit a capital restoration plan; or (iii) affecting compliance by brokers, dealers, government securities brokers, and government securities dealers with the financial responsibility requirements of the Securities Exchange Act of 1934 and regulations and order thereunder.

   [.17] 17. If the Bank is or becomes undercapitalized by failing to meet the FDIC's required minimum level for any relevant capital measure, the Bank shall not permit its average total assets during any calendar quarter to exceed its average total assets during the preceding calendar quarter unless: (i) the FDIC has accepted the Bank's capital restoration plan; (ii) any increase in total assets is consistent with the Bank's capital restoration plan; and (iii) the Bank's ratio of tangible equity to assets increases during the calendar quarter at a rate sufficient to enable the Bank to become adequately capitalized within a reasonable time.

   [.18] 18. If the Bank is or becomes undercapitalized by failing to meet the FDIC's required minimum level for any relevant capital measure, the Bank shall not, directly or indirectly, acquire any interest in any company or insured depository institution, establish or acquire any additional branch office, or engage in any new line of business unless: (i) the FDIC has accepted the Bank's capital restoration plan, the Bank is implementing the capital restoration plan, and the FDIC determines that the proposed action is consistent with and will further the achievement of the capital restoration plan; or (ii) the FDIC Board of Directors determines that the proposed action will further the purpose of the Bank's capital restoration plan.

   [.19] 19. If the Bank is or becomes undercapitalized by failing to meet the FDIC's required minimum level for any relevant capital measure, the Bank shall not pay interest on new or renewed liabilities at a rate that would increase the Bank's weighted average cost of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the Bank's normal market areas unless: (i) the FDIC has accepted the Bank's capital restoration plan; and (ii) the Bank obtains the FDIC's prior written approval.

   [.20] 20. 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 sent 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.

   [.21] 21. No later than 30 days after the end of each quarter following the effective date of this ORDER, the Bank shall furnish written progress reports to the Regional Di- {{12-31-94 p.C-3414}}rector and the Superintendent detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. 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, 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.
   Pursuant to delegated authority.
   Dated at San Francisco, California, this 31st day of August, 1993.

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