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FDIC Enforcement Decisions and Orders

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   [11,066] In the Matter of Community Bank, Pasadena, California, Docket No. FDIC-94-134b (10-5-94).

   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 such a manner as to produce operating losses; operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 5-8-96. See ¶16,092.)

   [.1] Board of Directors—Election—Outside Directors Added
   [.2] Assets—Adversely Classified—Eliminate/Reduce
   [.3] Investment Policy—Revision—Minimum Requirements
   [.4] Bank Operations—Overhead and Expenses—Control
   [.5] Violations of Law—Eliminate/Correct
   [.6] Liquidity and Funds Management—Policy Required
   [.7] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.8] Compensation—Limits on Increases and Severance
   [.9] Assets—Divesture Required
   [.10] Affiliated Organizations—Transactions With—Policy
   [.11] Loan Policy—Written Revision—Minimum Requirements
   [.12] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

COMMUNITY BANK
PASADENA,CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-94-134b

   Community Bank, Pasadena, 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 September 22, 1994, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound

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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 or 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 loans and Other Real Estate;
   (d) following inadequate lending and collection practices;
   (e) operating with inadequate provisions for liquidity and funds management;
   (f) operating with inadequate internal routine and controls policies;
   (g) operating in such a manner as to produce operating losses; and
   (h) operating in violation of section 23B of the Federal Reserve Act, 12 U.S.C. § 371c-1, 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-4 through 6-b-6 of the Report of Examination as of December 31, 1993; sections 215.4(a) and 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.4(a) and 215.4(b), 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-b-2 through 6-b-3 of the Report of Examination as of December 31, 1993; sections 3355 and 3356 of the California Financial Code as more fully described on pages 6-b-7 and 6-b-8 of the Report of Examination as of December 31, 1993; Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. §323, as more fully described on pages 6-b-8 and 6-b-9 of the Report of Examination as of December 31, 1993; and section 103 of the Rules and Regulations of the Department of Treasury, 31 C.F.R. Part 103, as more fully described on page 6-b-9 of the Report of Examination as of December 31, 1993.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. Within 120 days from the effective date of this ORDER, the Bank shall add at least two new members to its board of directors and within 180 days from the effective date of this ORDER, the Bank shall add a third new member to its board of directors. The new members shall be residents of Southern California and shall not be officers of the Bank or related to any officer of the Bank or to any Bank shareholder owning more than five (5.0) percent of the Bank's outstanding shares. In connection with the requirements of this paragraph, the Bank shall cause its articles of incorporation, bylaws or other governing corporate instrument to be amended to reflect the addition of the three new directors.

       [.2] 2. (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 December 31, 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. 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 December 31, 1993 that have not previously been charged off to not more than $84,000,000.
       (b) 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 December 31, 1993 that have not previously been charged off to not more than $70,000,000.
       (c) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard"

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    and those assets classified "Doubtful" as of December 31, 1993 that have not previously been charged off to not more than $60,000,000.
       (d) Within 480 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of December 31, 1993 that have not previously been charged off to not more than $40,000,000.
       (e) The requirements of subparagraphs 2(a), 2(b), 2(c), 2(d), and 2(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 2(b), 2(c), 2(d), 2(e), and 2(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.

   [.3] 3. Within 60 days from the effective date of this ORDER, the Bank shall develop and adopt an investment policy which includes clear guidelines for the designation and treatment of investments to be "held to maturity" as opposed to investments which are designated "available for sale" as such terms are defined in Financial Accounting Standards Board Statement No. 115. The policy shall provide clear guidelines covering REMIC securities and derivative investments and shall limit the exposure of the Bank to market interest rates as discussed on page 6-a of the Report of Examination as of December 31, 1993. The Bank shall also comply with the FDIC's Policy Statement entitled "Supervisory Policy Statement on Securities Activities" effective February 10, 1992.

   [.4] 4. 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 Bank shall on at least a quarterly basis prepare a report comparing actual performance to the budget commencing with the third quarter of 1994. The plan shall be in a form and manner acceptable to the Regional Director.

   [.5] 5. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all cited violations of law which are more fully set out on pages 6-b through 6-b-9 of the Report of Examination of the Bank as of December 31, 1993, to the extent such violations can be legally eliminated or corrected. In addition, the Bank shall take all necessary steps to prevent recurrence of such cited violations and ensure future compliance with all applicable laws and regulations.

   [.6] 6. Within 60 days from the effective date of this ORDER, the Bank shall amend its liquidity and funds management policy to correct deficiencies and ensure implementation of the policy with respect to the liquidity and funds management weaknesses noted on pages 4-b, 5, 5-a, 6-a, and 6-a-1 of the Report of Examination as of December 31, 1993. In addition, within 180 days of the effective date of this ORDER, the Bank shall achieve and maintain a liquidity ratio of no less than 20%. Such ratio shall be calculated in accordance with the guidelines set forth on page 5-b of the Report of Examination as of December 31, 1993. In establishing minimum liquidity maintenance, the Bank shall fully consider the volatility of its deposit base and dependence, if any, on borrowing lines. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Bank shall revise, strengthen and implement a policy for the operation of the Bank in such a manner as to provide adequate internal routine and control policies consistent with safe and sound banking practices. At a minimum, such policy shall address all deficiencies noted on pages 6-e through 6-e-10 of the Report of Examination as of December 31, 1993 and institute and implement procedures to prevent their recurrence. Such policy and its implementation shall be in a form and manner satisfactory to the Regional Director.
   [.8] 8. During 1995, the Bank shall not compensate any Bank senior executive officer (as defined in section 32 of the Act, 12 U.S.C. § 1831i) or director in an amount exceeding one hundred five (105) percent of the annual compensation for that officer or director approved by the board of directors as of December 31, 1993 without the prior written {{12-31-94 p.C-3793}}consent of the Regional Director. During subsequent years, while this Order is in effect, the Bank shall not compensate any Bank senior executive officer or director in an amount exceeding one hundred five (105) percent of the annual compensation of that officer or director for the previous year without the prior written consent of the Regional Director. Further, beginning with the effective date of this ORDER, the Bank shall not enter into any severance agreements with directors or senior executive officers without the prior written consent of the Regional Director. For the purpose of this paragraph, "compensate" and "compensation" refers to any and all salaries, bonuses, and other benefits of every kind and nature whatsoever, whether paid directly or indirectly.

   [.9] 9. Within 60 days of the effective date of this ORDER, the Bank shall submit to the Regional Director divesture plans for the Victorville Joint Venture and the Riverside Drive real estate investment.

   [.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall revise its policies regarding transactions with affiliates and insiders to cover all types of financial arrangements, including, but not limited to:

       (a) the provision of office space for directors and their businesses;
       (b) the provision of Bank employees to perform services for directors and their financial interest; and
       (c) the provision of other services.
    The policy shall clarify authorized expenses to be incurred by directors and shall provide an approval and review process for such expenses.

   [.11] 11. Within 60 days from the effective date of this ORDER, the Bank shall amend its loan policy to provide for the placement of loans on nonaccrual status as discussed on pages 6-a and 6-a-1 of the Report of Examination as of December 31, 1993.

   [.12] 12. 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, 555 - 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.
   13. Within 60 days after each quarter following the effective date of this ORDER, 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 last 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 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 5th day of October, 1994.
   Pursuant to delegated authority.

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