Federal Deposit
Insurance Corporation

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   [¶10,895] In the Matter of Charter Pacific Bank, Agoura Hills, California, Docket No. FDIC-92-253b (11-2-93).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate capital; operating with an excessive level of poor quality assets; operating without adequate reserve for loan losses; following inadequate lending and collection practices; operating with excessive overhead; operating with inadequate provisions for liquidity and funds management; operating without proper internal routine and controls; operating in such a manner as to produce operating losses; and operating in violation of applicable laws or regulations.

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Lending and Collection Policy—Minimum Requirements
   [.6] Loan Loss Reserve—Establish/Maintain
   [.7] Bank Operations—Overhead and Expenses—Plan
   [.8] Violations of Law—Eliminate/Correct
   [.9] Asset/Liability Management—Written Policy—Minimum Requirements
   [.10] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.11] Dividends—Restricted
   [.12] Compensation—Executives—Written Policy Required
   [.13] Audit—Internal—Minimum Requirements
   [.14] Conflicts of Interest—Written Policy Required
   [.15] Assets—Average Assets—Limit on Increase
   [.16] Brokered Deposits—Notice to FDIC Required
   [.17] Shareholders—Disclosure—Cease and Desist Order
   [.18] Real Estate Activities—Compliance with State Law Required

{{1-31-94 p.C-3486}}
In the Matter of

CHARTER PACIFIC BANK
AGOURA HILLS,CALIFORNIA
(Insured State Nonmember Bank)
ORDER
TO
CEASE AND DESIST
FDIC-92-253b
   The Federal Deposit Insurance Corporation ("FDIC"), on August 10, 1992, issued to Charter Pacific Bank, Agoura Hills, California ("Bank"), a NOTICE OF CHARGES AND OF HEARING ("NOTICE"), pursuant to section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1). The NOTICE charges the Bank with having engaged in unsafe or unsound banking practices and violations of law and/or regulations.
   The Bank and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated August 23, 1993, whereby, solely for the purpose of this proceeding and without admitting or denying the allegations in the NOTICE, 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 as set forth in the FDIC Report of Examination as of February 18, 1992, and the FDIC Report of Examination as of February 22, 1993. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   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 equity capital and reserves in relation to the volume and quality of assets held by the Bank;
   (b) operating with a large volume of poor quality loans, Real Estate Investments, Other Real Estate, Income Earned (Not Collected), and Other Assets;
   (c) operating with an inadequate loan valuation reserve;
   (d) following inadequate lending and collection practices;
   (e) operating with excessive overhead;
   (f) operating with inadequate provisions for liquidity and funds management;
   (g) operating with inadequate routine and controls policies;
   (h) operating in such a manner as to produce operating losses; and
   (i) operating in violation of Parts 323 and 337.6 of the FDIC Rules and Regulations, 12 C.F.R. Parts 323 and 337.6, as more fully described on Pages 6-b through 6-b-4 of the Report of Examination as of February 22, 1993.
   IT IS FURTHER ORDERED that the Bank take affirmative actions as follows:

   [.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.

[.2]2. (a) As of the effective date of this ORDER, the Bank shall have Part 325 Tier 1 capital in such an amount as to equal or exceed seven and one-quarter (7.25) percent of the Bank's total assets. Thereafter, during the life of this ORDER, the Bank shall maintain Part 325 Tier 1 capital in such an amount as to equal or exceed seven and one-quarter (7.25) 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 maintain 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 Part 325 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 Part 325 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.

[.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 February 22, 1993, 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 120 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of February 22, 1993, that have not previously been charged off to not more than $15,000,000.
   (c) Within 240 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of February 22, 1993, that have not previously been charged off to not more than $12,000,000.
   (d) 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 February 22, 1993, that have not previously been charged off to not more than $9,000,000.
   (e) Within 120 days from the effective date of this ORDER, the Bank shall have reduced the assets listed for Special Mention to zero.
   (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 Bank shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this Paragraph. As used in Subparagraphs 3(b), 3(c), 3(d), 3(e), 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.

   (i) collateral in the form of liens on or pledges of real or realizable value sufficient to discharge the debt (including accrued interest) in full; or
   (ii) the guaranty of a financially responsible party.

   [.5] 5. 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. The revised policies shall, among other things, address deficiencies in credit administration discussed on Pages 1-a-3, 1-a-4, 6, 6-a, and 6-a-1 of the Report of Examination as of February 22, 1993. Such policies and their implementation shall be in form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.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 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 Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.8] 8. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law which are more fully set out on Pages 6-b, 6-b-1, 6-b-2, 6-b-3, and 6-b-4 the Report of Examination of the Bank as of February 22, 1993. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations. Correction of violations of section 337.6 of FDIC {{1-31-94 p.C-3490}}Rules and Regulations may take place as the respective deposits mature.

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

   (i) establishing a range for the Bank's volatile liability dependence ratio, as computed by the FDIC in its Reports of Examination, and which ratio shall, within 180 days from the effective date of this ORDER, be reduced to not more than ten (10.0) percent. The volatile liability dependence ratio shall take into account time deposits in denominations of $90,000 or larger, or brokered deposits as defined in section 337.6 of the FDIC Rules and Regulations (12 C.F.R. § 337.6, as amended May 29, 1992). The requirements of this Paragraph shall not be construed as standards for future operations, and the Bank's volatile liability dependency ratio shall be maintained at a level consistent with prudent banking practices;
   (ii) establishing a range for short-term investments to potentially volatile liabilities, as those terms are defined by the FDIC in its current edition of "A Users Guide for the Uniform Bank Performance Report";
   (iii) establishing maturity ranges for the Bank's investment portfolio.
   (iv) establishing acceptable ranges for the Bank's rate sensitivity and gap ratios; and
   (v) the establishing of an asset/ liability committee, including a description of its responsibilities, how often it will meet, how it will obtain information and guidance from the board of directors, and how its activities will be reported to the board of directors.

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

   [.12] 12. Within 30 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement a written executive compensation (bonus) agreement. The agreement shall specifically contain a provision which provides for the prior approval of any bonus payments to directors and/or officers of the Bank. The agreement shall also incorporate qualitative as well as profitability performance standards and shall otherwise be in a form and manner acceptable to the Regional Director and Superintendent.

   [.13] 13. Within 60 days from the effective date of this ORDER, the Bank shall develop, adopt, and implement an internal audit program for its data processing activities to correct deficiencies cited on Pages 6-d and 6-d-1 in the Report of Examination as of February 22, 1993, which shall, at a minimum, include the following:

   (a) that the Bank shall conduct a periodic review of the qualifications and independence of the internal auditor, the scope and frequency of the audit, the techniques used in performing the audit, the overall condition of the organization's EDP controls and operations, and management's actions to resolve material weaknesses in audit reports;
   (b) that the Bank shall insure that management maintains a record of all reviews of the Bank's EDP systems which includes a review by management of transaction logs, program tests, and maintenance logs;
   (c) that the Bank shall insure that management properly documents program changes, with all such program changes being approved by management after the proper documentation is presented;
   (d) that the Bank shall adopt and implement a policy specifying that pass- {{12-31-96 p.C-3491}}words be changed at least every six months, that a log be prepared listing the date each individual's password was last changed, and that the log be reviewed by a board EDP Committee to ensure that all operators adhere to the policy;
   (e) that the Bank shall reconcile its suspense resource account on a regular basis and include such account in the Bank's monthly certification program; and
   (f) that the Bank shall store its back-up files in off-site storage facilities, that the off-site files will be maintained in machinereadable form with no more than a two-day lag between the current master files and the files kept in off-premises storage facilities, and that new back-up files will be rotated to off-premise storage before the old back-up files are returned to the data center.

   [.15] 15. During the life of this ORDER, the Bank shall not increase its average assets by ten (10.0) percent or more during any one year period without receiving the prior written approval of the Regional Director and the Superintendent. The approval shall be requested at least sixty (60) days in advance of the period during which the Bank intends to exceed the ten (10.0) percent growth restriction. Irrespective of the above, the Bank shall not increase its average assets by an amount that would result in a violation of the capital requirements set forth in Paragraph 2 of the ORDER.

   [.16] 16. While this ORDER is in effect, the Bank shall give written notice to the Regional Director and the Superintendent at such time as the Bank intends to make use of brokered deposits. The notification should indicate how the brokered deposits are to be utilized with specific reference to credit quality of investments/loans and the effect on the Bank's funds position and asset/liability matching. The Regional Director and the Superintendent shall have the right to reject the Bank's plans for utilizing brokered deposits. For purposes of this ORDER, brokered deposits are defined as described in section 337.6(a)(1) of the FDIC Rules and Regulations to include any deposits funded by third party agents or nominees for deposits, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or assets a right to federal deposit insurance.

   [.17] 17. 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.

   [.18] 18. 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.

   [.19] 19. 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 {{12-31-96 p.C-3492}}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.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 2nd day of November, 1993.