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{{7-31-94 p.C-3580}}
   [10,944] In the Matter of Mid-State Bank, Arroyo Grande, California, Docket No. FDIC-94-8b (2-3-94).

   Bank to cease and desist from such unsafe or unsound practices as operating with management deficiencies; operating with inadequate capital; operating with
{{3-31-97 p.C-3581}}an excessive level of poor quality loans; operating with inadequate allowance for loan and lease losses; following hazardous lending and lax collection practices; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 1-15-97. See ¶16,146.)

   [.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] Loan Loss Reserve—Establish/Maintain
   [.6] Bank Operations—Loan Adjustment Department—Duties
   [.7] Violations of Law—Eliminate/Correct
   [.8] Dividends—Restricted
   [.9] Loans—Concentrations—Construction and Land Development— Reduce
   [.10] Investments—Real Estate—Reserves Required
   [.11] Loan Policy—Written Revision—Minimum Requirements
   [.12] Investments—Real Estate—Divestiture Plan
   [.13] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

STATE BANK
ARROYO GRANDE,CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO
CEASE AND DESIST

FDIC-94-8b

   Mid-State Bank, Arroyo Grande, 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 January 31, 1994, 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, its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and its successors and assigns cease and desist from the following unsafe and unsound banking practices and violations of law and/or regulation:
   (a) operating with management deficiencies;
   (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; and
   (f) operating in violation of sections 323, 350, and 362 of the FDIC's Rules and Regulations, 12 C.F.R. §§ 323, 350, and 362, as more fully described on pages 6-b and 6-b-1 of the Report of Examination as of September 7, 1993.
{{3-31-97 p.C-3582}}IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, 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 requiring particular attention. 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) During the life of this ORDER, the Bank shall continue to maintain Tier 1 capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Bank's total assets.
       (b) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraph 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 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 of this ORDER may not be accomplished through a deduction from the Bank's loan loss reserves.
       (d) If compliance with Paragraph 2 of this ORDER is to be 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 {{4-30-94 p.C-3583}}- 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 any increase in Tier 1 capital is to be 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(t) and 325.2(v).

    [.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 50 percent of those assets classified "Doubtful" as of September 7, 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 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of September 7, 1993, and those assets classified "Doubtful" that have not previously been charged off to not more than $80,000,000.
       (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 September 7, 1993, that have not previously been charged off to not more than $65,000,000.
       (d) Within 540 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of September 7, 1993, that have not previously been charged off to not more than $55,000,000.
       (e) For purposes of the requirements set forth in subparagraphs 3(a), 3(b), 3(c), and 3(d) of this ORDER, the assets classified "Loss", "Doubtful" and "Loss" as of September 7, 1993 do not include assets owned in whole or in part by Mid Coast Land Company, a wholly owned subsidiary of the Bank.
       (f) 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), 3(d), 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.

    [.4] 4. (a) Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, "Loss" or "Doubtful" and is uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.
       (b) Additionally, during the life of this ORDER, the Bank shall not extend, directly {{4-30-94 p.C-3584}}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" and is uncollected without the prior approval of its board of directors.

   [.5] 5. 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 at subsequent examinations and/or visitations.

   [.6] 6. Within 60 days from the effective date of this ORDER, the Bank shall establish and adequately staff a special assets, loan adjustment or similar department. Such department shall be given responsibility for the supervision, restructuring and collection of designated problems assets, and shall be managed by an officer that reports directly to the Bank's senior credit officer. The duties of such a department shall include, but not be limited to, the development of written "action plans" for each problem asset or problem loan aggregating $100,000 or more. Such department shall also be required to provide a monthly summary of its activities and the new action plans to the directors' loan committee.

   [.7] 7. 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 and 6-b-1 of the Report of Examination of the Bank as of September 7, 1993. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

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

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall develop a written plan, approved by its board of directors and acceptable to the Regional Director and the Superintendent for systematically reducing the amount of loans or other extensions of credit advanced, directly or indirectly, to or for the benefit of, any borrowers in the "Construction and Land Development Concentration" as listed on page 2-c in the Report of Examination as of September 7, 1993.

   [.10] 10. Following the effective date of this ORDER, the Bank shall establish and maintain adequate reserves for potential losses arising from direct and indirect real estate investments as more fully described on page 1-a-2 of the Report of Examination as of September 7, 1993.

   [.11] 11. Following the effective date of this ORDER, the Bank shall implement and comply with its previously established policy for accounting for nonaccrual loans.

   [.12] 12. Following the effective date of this ORDER, the Bank shall conduct a review, and if necessary, modification of its divestiture plan regarding direct and indirect equity investments in real estate. Such review and modification shall be conducted on a semi-annual basis commencing June 1, 1994.

   [.13] 13. 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, {{12-31-96 p.C-3585}}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.
   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 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.
   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 3rd day of February, 1994.
   Pursuant to delegated authority.

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