Federal Deposit
Insurance Corporation

{{5-31-96 p.C-3873}}
   [¶11,102] In The Matter of Monarch Bank, Laguna Niguel, California, Docket No. FDIC-94-170b (12-13-94).

   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; operating without adequate reserve for loan losses; following hazardous lending and lax collection practices; operating without proper internal routine and controls; operating in such a manner as to produce operating losses; operating with hazardous concentrations of credit; reporting inaccurate call reporting information; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 3-11-96. See ¶16,082.)

   [.1] Management—Qualifications—Review
   [.2] Board of Directors—Duties Specified
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Loan Policy—Written Revision—Minimum Requirements
   [.7] Loans—Concentrations of Credit—Reduction Plan
   [.8] Loan Loss Reserve—Establish/Maintain
   [.9] Budget and Earnings Plan—Preparation Required
   [.10] Violations of Law—Eliminate/Correct
{{5-31-96 p.C-3874}}
   [.11] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.12] Reports of Condition and Income—Amendment Required
   [.13] Dividends—Restricted
   [.14] Shareholders—Disclosure—Cease and Desist Order

In The Matter of

MONARCH BANK
LAGUNA NIGUEL, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-94-170b
   Monarch Bank, Laguna Niguel, California ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violation of laws 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 November 21, 1994, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violation of laws 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 violation of laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   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 violation of laws and/or regulations:
   (a) operating with inadequate management;
   (b) operating with inadequate Tier 1 capital 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 practices and policies;
   (f) operating with inadequate internal routine and controls policies and practices;
   (g) operating in such a manner as to produce operating losses;
   (h) operating with a large volume of concentrations of credit;
   (i) reporting inaccurate call reporting information; and
   (j) operating in violation of section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, 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 page 8.26 of the Report of Examination as of June 27, 1994; section 22(h) of the Federal Reserve Act, as amended, 12 U.S.C. § 375b, as more fully described on page 8.27 of the Report of Examination as of June 27, 1994; and section 215.4(e) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(e), 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 page 8.27 of the Report of Examination as of June 27, 1994; section 325.3(b)(2) of the FDIC's Rules and Regulations, 12 C.F.R. § 325.3(b)(2), as more fully described on page 8.26 of the Report of Examination as of June 27, 1994; section 329.2 of the FDIC's Rules and Regulations, 12 C.F.R. § 329.2, as more fully described on page 8.27 of the Report of Examination as of June 27, 1994; section 344.3(c)(3) of the FDIC's Rules and Regulations, 12 C.F.R § 344.3(c)(3); as more fully described on page 8.28 of the Report of Examination as of June 27, 1994; section 344.3(c)(4) of the FDIC's Rules and Regulations, 12 C.F.R. § 344.3(c)(4); section 303.4 of the FDIC's Rules and Regulations, 12 C.F.R. § 303.4 as {{2-28-95 p.C-3875}} more fully described on page 8.25 of the Report of Examination as of June 27, 1994; as more fully described on page 8.25 of the Report of Examination as of June 27, 1994.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. During the life of this ORDER 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 financial institution of comparable size, and experience in upgrading low quality assets. Management should also include a senior lending officer with significant lending, collection, and loan supervision experience and a chief financial officer with appropriate experience and abilities. 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 Bank 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.

   (a) meeting no less frequently than monthly at which, at a minimum, the following areas shall be reviewed and approval: reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity; operating policies; and individual committee actions. Board minutes shall document these reviews and approvals, including the names of any dissenting directors;
   (b) exercising independent judgment in evaluating management's actions and competence;
   (c) ensuring adequate internal controls are in place; and
   (d) ensuring compliance with laws, policies, and regulations.

[.3] 3. (a) By no later than April 30, 1995, the Bank shall have 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) Within 60 days from the effective date of this ORDER, the Bank shall develop and adopt a plan to meet 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 Direc- {{2-28-95 p.C-3876}} tor as determined at subsequent examinations.
   (c) 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 and Superintendent as determined at subsequent examinations and/or visitations.
   (d) Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3 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 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 3 of this ORDER may not be accomplished through a deduction from the Bank's loan loss reserves.
   (e) If all or part of the increase in Tier 1 capital required by Paragraph 3 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.
   (f) In complying with the provisions of Paragraph 3 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.
   (g) 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 June 27, 1994, 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) By no later than December 31, 1994, the Bank shall have reduced the assets classified "Substandard" as of June 27, 1994 that have not previously been charged off to not more than $4,100,000.
   (c) By no later than March 31, 1995, the Bank shall have reduced the assets classified "Substandard" as of June 27, {{2-28-95 p.C-3877}} 1994 that have not previously been charged off to not more than $3,600,000.
   (d) By no later than June 30, 1995, the Bank shall have reduced the assets classified "Substandard" as of June 27, 1994 that have not previously been charged off to not more than $3,100,000.
   (e) By no later than September 30, 1995, the Bank shall have reduced the assets classified "Substandard" as of June 27, 1994 that have not previously been charged off to not more than $2,600,000.
   (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 is not considered collection for the purpose of this paragraph. 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 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 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") as amended.
   (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, as amended, 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) 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, as amended, 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, including 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.

   (a) failure to develop underwriting guidelines for the mortgage loan and un-secured loan portfolios; {{2-28-95 p.C-3878}}    (b) limited monitoring of Redi-Line accounts;
   (c) inadequate cash flow analysis;
   (d) limited monitoring of portfolio diversification;
   (e) inaccurate or omitted statements on credit memoranda;
   (f) other loan policy deficiencies in the areas of:

   (i) troubled debt restructuring;
   (ii) other real estate;
   (iii) credit review;
   (iv) nonaccrual guidelines; and
   (v) appraisal guidelines

   (g) weaknesses in the internal asset review system including:

   (i) inaccurate internal loan grading;
   (ii) lack of independence;
   (iii) over reliance on external loan review consultants; and
   (iv) deficiencies in the loan loss reserve methodology.

[.8] 8. (a) Within 10 days from the effective date of this ORDER, the bank shall establish and thereafter maintain adequate reserve for loan losses.
   (b) Additionally, during the life of this ORDER, the board of directors shall fully implement its 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 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 loan loss reserve consistent with the loan loss reserve policy established. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent 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 improve the Bank's net interest margin, increase interest income, 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, upon completion, shall be submitted to the Regional Director and Superintendent for their review and opportunity for comment.
   (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 effec- {{5-31-96 p.C-3879}}tive date of this ORDER, the Bank shall eliminate and/or correct, to the extent possible, all violations of laws (except the violation of Part 325) which are more fully set out on pages 8.25 through 8.28 of the Report of Examination of the Bank as of June 27, 1994. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

[.11] 11. (a) Within 60 days from the effective date of this ORDER, the Bank shall adopt 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. Such policy shall, at a minimum, eliminate and/or correct all internal routine and control deficiencies as more fully set forth on pages 8b.1 through 8b.3 of the Report of Examination of the Bank as of June 27, 1994 and shall guarantee that the Bank will take all necessary steps to ensure future compliance with all applicable laws and regulations. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
   (b) Within 60 days from the effective date of this ORDER, the Bank shall develop and implement an internal audit program that establishes procedures to protect the integrity of the Bank's operational and accounting systems. The program shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.13] 13. The Bank shall not pay cash dividends without the prior written consent 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 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 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.
   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 13th day of December, 1994.
   Pursuant to delegated authority.