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FDIC Enforcement Decisions and Orders

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{{4-30-96 p.C-3615}}
   [10,958]In the Matter of Corporate Bank, Santa Ana, California, Docket No. FDIC-93-31b (3-15-94).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate management; operating with inadequate capital; operating with an excessive level of poor quality assets; following hazardous lending and lax collection practices; operating with inadequate provisions for liquidity and funds management; operating without proper internal routine and controls; operating in {{4.30-96 p.C-3616}}such a manner as to produce low earnings; operating in violation of applicable laws or regulations; and operating with employment agreements that contain imprudent termination provisions and provide for excessive severance pay. (This order was terminated by order of the FDIC dated 2-8-96. See ¶16,070.)

[.1] Board of Directors—Increase Supervision
[.2] Management—Qualifications—Review
[.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
[.4] Assets—Adversely Classified—Eliminate/Reduce
[.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
[.6] Lending and Collection Policy—Minimum Requirements
[.7] Loans—Concentrations of Credit—Risk Segmentation Analysis
[.8] Loan Loss Reserve—Establish/Maintain
[.9] Budget and Earnings Plan—Preparation Required
[.10] Violations of Law—Eliminate/Correct
[.11] Dividends—Restricted
[.12] Compensation—Review and Plan Required
[.13] Compensation—Specific Individual—Agreement Rescinded
[.14] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

CORPORATE BANK
SANTA ANA, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO
CEASE AND DESIST

FDIC-94-31b

   Corporate Bank, Santa Ana, 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 March 8, 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 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 assets;
   (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;
   (h) operating in such a manner as to produce low earnings;
   (i) operating in violation of section 323 of the Federal Deposit Insurance Corporation {{5-31-94 p.C-3617}}Rules and Regulations 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-b & 6-b-1 of the Report of Examination as of August 9, 1993; and
   (j) operating with employment agreements which contain imprudent termination provisions and provide for excessive amounts of severance pay.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. Within 30 days from the effective date of this ORDER, the board of directors shall increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of the Bank's management, consistent with the role and expertise commonly expected for directors of Banks of comparable size. This participation shall include meetings to be held no less frequently than monthly at which, at a minimum, the following areas shall be reviewed and approved: reports of income and expenses; new, overdue, nonaccrual, renewal, insider, charged-off, and recovered loans; investment activity; operating policies; and individual committee action. Board minutes shall document these reviews and approvals, including the names of any dissenting directors.

   [.2] 2. 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") 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.

    [.3] 3. (a) 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 3(a) shall be in addition to a fully funded loan loss reserve, the adequacy of which shall be satisfactory to the Regional Director as determined at subsequent examinations and/or visitations.
       (c) 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).

    [.4] 4. (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 August 9, 1993, that have not been pre {{5-31-94 p.C-3618}}viously 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 August 9, 1993 that have not previously been charged off to not more than $5,750,000.
       (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of August 9, 1993 that have not previously been charged off to not more than $5,000,000.
       (d) Within 270 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of August 9, 1993 that have not previously been charged off to not more than $4,500,000.
       (e) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of August 9, 1993 that have not previously been charged off to not more than $4,000,000.
       (f) The requirements of subparagraphs 4(a), 4(b), 4(c), 4(d), and 4(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 to the same or related borrower is not considered collection for the purpose of this paragraph unless such other loans do not warrant any adverse classification, as determined by the FDIC. As used in subparagraphs 4(b), 4(c), 4(d), 4(e), and 4(f) the word "reduce" means:
         (i) to collect;
         (ii) to charge-off; or
         (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.

    [.5] 5. (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 of other extension of credit from the Bank that has been charged off or classified, in whole or in part, "Loss" and is uncollected. Subparagraph 5(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. Subparagraph 5(b) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with FASB 15, providing that such renewal or extension shall be made only with the prior written approval of a majority of the board of directors or the loan committee of the Bank.
       (c) In connection with subparagraph 5(a) and 5(b) and all other relevant provisions of this ORDER, the Bank shall not:
         (i) continue the accrual of interest on any loan which is delinquent in principal or interest payments ninety (90) days or more unless the asset is both well secured and in the process of collection; or
         (ii) engage in any practice or device which essentially avoids recognition of overdue loans and/or artificially inflates the income of the Bank. For any loans restructured in accordance with FASB 15, consideration should be given to the reasonableness of the modified terms of the loan, since loans should not be restructured in an attempt to conceal credit losses or delay their recognition.
       (d) For the purpose of subparagraph 5(c) of this ORDER, debt is "well secured" if it is secured by:
         (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.
    A debt is "in the process of collection" if collection of the debt is proceeding in due course either through legal action, includ {{5-31-94 p.C-3619}}ing judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status.

    [.6] 6. (a) 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, which policies shall include specific guidelines for renewal of loans and for placing loans on a non-accrual basis. In addition, the Bank shall, to the extent possible, obtain adequate and current documentation for all loans in the Bank's loan portfolio as of the effective date of this ORDER. For all subsequent new loans, the Bank shall obtain adequate and current documentation. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director 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, 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;
         (ii) 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;
         (iii) provisions which require adequate loan analysis, 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;
         (iv) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values;
         (v) provisions which specify the circumstances and conditions under which real estate appraisals must be conducted by an independent third party;
         (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 that directors first determine that the lending staff has the expertise necessary to properly supervise constitution loans and that adequate procedures are in place to monitor any construction involved before funds are disbursed;
         (x) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans which are classified "Substandard" as of August 9, 1993 or by the FDIC or California State Banking Department in subsequent Reports of Examination and all other loans which warrant individual review and consideration by the board of directors as determined by the loan committee or active management. The loan "watch list" shall be presented to the board of directors for review at least monthly with such review noted in the minutes;
         (xi) provisions which require individual detailed, written plans and strategies for monitoring and collecting all loans of $25,000 or greater which are included on the "watch list"; and
         (xii) 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 {{5-31-94 p.C-3620}}all members are present and the vote of each is noted.

   [.7] 7. Within 90 days from the effective date of this ORDER, the Bank shall perform a risk segmentation analysis with respect to the Concentrations of Credit listed on page 1-a-3 of the Report of Examination of the Bank as of August 9, 1993. Concentrations should be identified by product type, geographic distribution, underlying collateral or other asset groups which are considered economically related and in the aggregate represent a large portion of the Bank's capital account. A copy of this analysis will be provided to the Regional Director and the board agrees to develop a plan to reduce any segment of the portfolio which the Regional Director deems to be an undue concentration of credit in relation to the Bank's capital account. The plan and its implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations.

   [.8] 8. Within 10 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 five (5) days prior to the filing of the quarterly reports of condition and income, 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 for which it was discovered, prior to submitting the Report of Condition, by a charge to that quarter's 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 maintain its loss reserve consistent with the loan loss reserve policy established. Such policy and its implementation shall be satisfactory to the Regional Director as determined at subsequent examinations and/or visitations.

    [.9] 9. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and fully implement a written plan and a comprehensive budget for all categories of income and expense. The plan and budget required by this paragraph shall include formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and improve and sustain earnings of the Bank. The plan shall include a description of the operating assumptions that form the basis for and adequately support, major projected income and expense components. Thereafter, the Bank shall formulate such a plan and budget by November 30 of each subsequent year.
       (b) The plan and budget required by subparagraph 9(a) of this ORDER, shall be acceptable to the Regional Director as determined at subsequent examinations and/or visitations.
       (c) Following the end of each calendar quarter, the board of directors shall evaluate the Bank's actual performance in relation to the plan and budget required by subparagraph 9(a) of this ORDER and shall record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors meeting at which such evaluation is undertaken.

   [.10] 10. 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 of the Report of Examination of the Bank as of August 9, 1993. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.11] 11. The Bank shall not pay cash dividends in any amount except as follows:

       (a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
       (b) that after payment of such dividends, the ratio of Tier 1 capital to total assets of the Bank will be not less than seven (7.0) percent and the reserve for loan losses shall be at an adequate level;
{{5-31-94 p.C-3621}}
       (c) that such declaration and payment of dividends shall be approved in advance by the board of directors; and
       (d) that such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director, which approval shall not be unreasonably withheld.

   [.12] 12. Within 120 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, responsibilities, and authorities, 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.

   [.13] 13. The Bank shall rescind paragraph 6 of the Bank's Employment Agreement with Richard C. Brown dated May 15, 1990 ("Brown Employment Agreement"). Prior to entering into any modification of the Brown Employment Agreement with respect to any termination of the Brown Employment Agreement, and/or with respect to the payment of any and all sums, whether directly or indirectly, to Richard C. Brown as severance pay upon the Bank's termination of the Brown Employment Agreement, the Bank shall receive the prior written approval of the Regional Director.

   [.14] 14. 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 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.
   15. 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 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 and contain all reserve adequacy calculations and a current list of internally classified assets. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has 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 15th day of March, 1994.
   Pursuant to delegated authority.

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