Federal Deposit
Insurance Corporation

{{11-30-95 p.C-4095}}
   [¶11,226] In the Matter of Cerritos Valley Bank, Norwalk, Calif. Docket No. FDIC-95-126b (9-22-95).

   Bank ordered to cease and desist from such unsafe and unsound practices as operating with inadequate management; operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the bank; operating with a large volume of poor quality loans and other assets; operating with an inadequate allowance for loan and lease losses; following inadequate lending and collection practices; operating in such a manner as to produce low earnings; and operating in violation of California law and the FDIC's rules and regulations. (This order was terminated pursuant to an order of the FDIC dated 9-4-96. See ¶16,114.)
   [.1] Management—Qualifications Specified
   [.2] Capital—Tier 1 Capital—Increase/Maintain
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Loan Policy—Written Revision—Minimum Requirements
   [.6] Loan and Lease Losses—Adequate Allowance Required
   [.7] Profit Plan—Develop/Adopt
   [.8] Violations of Law—Eliminate/Correct
   [.9] Dividends—Payment Restricted
   [.10] Directors and Officers—Compensation Restricted
   [.11] Brokered Deposits—Notification to FDIC Required
   [.12] Shareholders—Disclosure—Cease and Desist Order
   [.13] Cease and Desist Order—Compliance Reports

In the Matter of

CERRITOS VALLEY BANK
NORWALK,CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO
CEASE AND DESIST
FDIC-95-126b
   Cerritos Valley Bank, Norwalk, 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 September 13, 1995, 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, {{11-30-96 p.C-4096}}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 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 assets;
   (d) operating with an inadequate allowance for loan and lease losses;
   (e) following inadequate lending and collection practices;
   (f) operating in such a manner as to produce low earnings; and
   (g) operating in violation of California Financial Code section 1221, as more fully described on page 8.13 of the Report of Examination as of February 27, 1995; California Financial Code section 1232, as more fully described on page 8.13 of the Report of Examination as of February 27, 1995; California Financial Code section 3354, as more fully described on page 8.14 of the Report of Examination as of February 27, 1995; California Government Code section 53663, as more fully described on page 8.14 of the Report of Examination as of February 27, 1995; Part 323 of the FDIC's Rules and Regulations, as more fully described on page 8.14 of the Report of Examination as of February 27, 1995; and Part 326 of the FDIC's Rules and Regulations, as more fully described on page 8.14 of the Report of Examination as of February 27, 1995.
   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 shall 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 shall 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") 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 (as defined in 12 C.F.R. 303.14). 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) Beginning with the effective date of this ORDER, 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 {{11-30-96 p.C-4097}}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 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 allowance for loan and lease losses, 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 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, 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 2 of this ORDER may not be accomplished through a deduction from the Bank's allowance for loan and lease losses.
   (e) If all or any part of the increase in Tier 1 capital that may be required by Paragraph 2 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. 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 any plan involving a public distribution of the Bank's securities 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 of the Bank, 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 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.
   (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).

   [.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" as of February 27, 1995, that have not been previously collected or charged-off. Within 30 days from the effective date of this {{11-30-96 p.C-4098}}ORDER, the Bank shall eliminate from its books, by charge-off or collection, 50 percent of those assets classified "Doubtful" as of February 27, 1995, that have not been previously collected or charged-off, unless otherwise approved in writing by the Regional Director. Elimination of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   (b) Additionally, while this ORDER remains in effect, the Bank shall, within 30 days of the receipt of any official Report of Examination of the Bank from the FDIC or the California State Banking Department, eliminate from its books, by collection, charge-off, or other proper entries, the remaining balance of any assets classified "Loss" and 50 percent of those classified "Doubtful" unless otherwise approved in writing by the Regional Director and the Superintendent.
   (c) Within 120 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of February 27, 1995 and those assets classified "Doubtful" that have not previously been charged-off to not more than $5,500,000.
   (d) Within 240 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of February 27, 1995 and those assets classified "Doubtful" that have not previously been charged-off to not more than $4,000,000.
   (e) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of February 27, 1995 and those assets classified "Doubtful" that have not previously been charged-off to not more than $3,000,000.
   (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.

   [.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" and is uncollected. Subparagraph 4(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" or "Doubtful" without the prior written approval of a majority of the board of directors or the loan committee of the Bank.

   [.5] 5. (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 placing loans on a non-accrual basis. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. Such policies and their implementation shall be specifically directed toward correction of deficiencies discussed on pages 8.3 through 8.5 of the February 27, 1995 Report of Examination; and shall otherwise be in a form and manner acceptable to the Regional Director and the Superintendent 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 {{11-30-96 p.C-4099}}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 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 which prohibit the issuance of standby letters of credit unless the letters of credit are fully secured by readily marketable collateral and/or are supported by current and complete financial information;
   (x) provisions that directors first determine that the lending staff has the expertise necessary to properly supervise construction loans and that adequate procedures are in place to monitor any construction involved before funds are disbursed;
   (xi) provisions which prohibit concentrations of credit in excess of 25 percent of the Bank's total equity capital and reserves to any borrower and that borrower's related interests;
   (xii) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $100,000 which are classified "Substandard" and "Doubtful" as of February 27, 1995 or by the FDIC or California State Banking Department in subsequent Reports of Examination and all other loans in excess of $100,000 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; and
   (xiii) 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 all members are present and the vote of each is noted.

   [.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 improve 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, to the extent legally possible, all apparent violations of law which are more fully set out on pages 8.13-8.14 of the Report of Examination of the Bank as of February 27, 1995. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

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

   [.10] 10. During 1996, the Bank shall not compensate any Bank director or senior executive officer, as defined in 12 C.F.R. § 303.14, in an amount exceeding one hundred five (105) percent of the annual compensation for that director or senior executive officer approved by the board of directors as of February 27, 1995. During subsequent years, while this Order is in effect, the Bank shall not compensate any Bank director or senior executive officer in an amount exceeding one hundred five (105) percent of the annual compensation of that officer or director for the previous year. In addition, as of the effective date of this Order, if any bonuses above and beyond base salary are paid, they must be approved in advance by the bank's board of directors, the Regional Director, and the Superintendent. The restrictions of this paragraph refer only to compensation of directors and senior executive officers, the amount of which exceeded $100,000 on February 27, 1995. 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.

   [.11] 11. 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 of 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 depositors, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or asserts a right to federal deposit insurance.

   [.12] 12. Following the effective date of this ORDER, the Bank shall sent 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.

   [.13] 13. Within 60 days of the end of the first quarter following the effective date of this ORDER, and within sixty (60) 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 {{11-30-96 p.C-4101}}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 22nd day of September, 1995.
   Pursuant to delegated authority.