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   [11,473] In the Matter of Charter Pacific Bank, Agoura Hills, California, Docket No. FDIC 98-4b (2-4-98)

   Bank to cease and desist from such unsafe and unsound practices.  (This order was terminated by order of the FDIC dated 3-10-99; see ¶16,213)

   [.1] Management—Qualifications Specified
   [.2] Assets—Tier 1 Capital
   [.3] Assets—Adversely Classified Assets—Reduction Required
   [.4] Loan Policy—Preparation or Revision of Policy Required
   [.5] Assets—Total Assets, Limitations Imposed on Increase of
   [.6] Violations of Law—Corrections of Violations Required

In the Matter of
CHARTER PACIFIC BANK
AGOURA HILLS, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-98-4b

   Charter Pacific Bank, Agoura Hills, 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 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 January 28, 1998, 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:

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 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 losses generated by the Bank's Bank Card Division ("Bank Card Division");
   (d) operating with an inadequate allowance for loan and lease losses and an inadequate allowance for losses attributed to the Bank Card Division;
   (e) following inadequate lending and collection practices and inadequate practices governing the operation of the Bank Card Division;
   (f) operating in such a manner as to produce operating losses; and
   (g) operating in violation of the following laws and regulations:

       (i) Section 1221(a) of the California Financial Code, as more fully described on Page 36 of the Report of Examination as of August 11, 1997;
       (ii) Part 364 of the FDIC's Rules and Regulations, 12 C.F.R. Part 364, as more fully described on Page 36 of the Report of Examination as of August 11, 1997; and
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       (iii) Sections 103.22(b) and (c) of the Department of the Treasury's Financial Recordkeeping and Reporting of Currency and Foreign Transactions Regulation, 31 C.F.R. Section 103, as more fully described on Pages 37 and 38 of the Report of Examination as of August 11, 1997.
   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 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. Management shall also include a senior officer with significant appropriate experience to supervise the Bank Card Division, including administration, identification and control of risk in the Bank Card Division. 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 Conrad W. Hewitt, Commissioner of Financial Institutions, Department of Financial Institutions, State of California ("Commissioner"), 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) Within 60 days from the effective date of this ORDER, the Bank shall have Tier 1 capital in such an amount as to equal or exceed eight (8.0) 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 eight (8.0) percent of the Bank's total assets.
   (b) During the life of this ORDER, the Bank shall 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.
   (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 both a fully funded allowance for loan and lease losses and a fully funded allowance for Bank Card Division losses, the adequacy of which shall be satisfactory to the Regional Director and Commissioner 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 and/or shareholders of the Bank; or
       (iv) any other means acceptable to the Regional Director and the Commissioner; or
       (v) any combination of the above means. Any increase in Tier 1 capital necessary to {{4-30-98 p.C-4473}}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 part of the increase in Tier 1 capital 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, 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 relative to interest rate and convertibility factor, shall be presented to the Regional Director and the Commissioner 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 ten days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets and contingent liabilities classified "Loss" as of August 11, 1997, 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 120 days from the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" as of August 11, 1997 that have not previously been charged off to not more than $10,000,000.
   (c) Within 240 days from the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" as of August 11, 1997 that have not previously been charged off to not more than $8,500,000.
   (d) within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "substandard" as of August 11, 1997 that have not previously been charged off to not more than $7,000,000.
   (e) Within 540 days from the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" as of August 11, 1997 that have not previously been charged off to not more than $5,000,000.
   (f) Within 720 days from the effective date of this ORDER, the Bank shall have reduced the assets and contingent liabilities classified "Substandard" as of August 11, 1997 that have not previously been charged off to not more than $3,000,000.
   (g) The requirements of Subparagraphs 3(a), 3(b), 3(c), 3(d), 3(e) and 3(f) 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 and contingent liabilities. Reduction of these assets and contingent liabilities through pro- {{4-30-98 p.C-4474}}ceeds 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. 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. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
   5. Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement a written policy governing the operation of the Bank Card Division which, at a minimum, shall include and address those matters discussed on Pages 22–24, 31–33, and 36 of the Report of Examination of August 11, 1997, as well as the following:
   (a) the policy shall require full disclosure of credit information in merchant files;
   (b) the policy shall require that merchant files include a detailed description of the product being sold; a history of a prospective merchant's business (including the date the business commenced and subsequent significant changes); the merchant's financial information (including signed tax returns and a signed and dated balance sheet); verification of a merchant's significant assets, especially for merchants with monthly processing dollar volume exceeding $500,000; disclosure and discussion of all Combined Terminated Merchant File matches; full disclosure of credit history and explanation of derogatory information; and a summary of overall strengths and weaknesses, with reasons stated for approval or denial;
   (c) the policy shall require that each new merchant account be reviewed and approved by a committee comprised of management and/or directors who possess acceptable credit underwriting skills and experience; and
   (d) the policy shall require that the file information be updated and reviewed at least annually.
   Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
   6. Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate allowance for loan and lease losses.
   Additionally, within 30 days from the effective date of this ORDER, the Board of Directors shall maintain and implement a comprehensive policy for determining the adequacy of the allowance for loan and lease losses. For the purpose of this determination, the adequacy of the allowance shall be determined after the charge-off of all loans or other items classified "Loss." The policy shall provide for a review of the allowance 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 and lease loss allowance 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 and lease 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 allowance 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 allowance for loan and lease losses consistent with the allowance on loan and lease loss policy established. Such policy and its implementation shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.
   7. Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate allowance for losses attributed to the Bank Card Division.
   Additionally, within 30 days from the effective date of this ORDER, the Board of {{4-30-98 p.C-4475}}Directors shall develop or revise, adopt and implement a comprehensive policy for determining the adequacy of the allowance for losses generated by the Bank Card Division. For the purpose of this determination, the adequacy of the allowance shall be determined after the charge-off of all items classified "Loss." The policy shall provide for a review of the allowance at least monthly and should also 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 allocations for the potential losses generated by the Bank Card Division may be properly reported in the quarterly Reports of Condition and Income. The review should focus on the results of the Bank Card Division's internal analysis of individual merchant accounts, its experience regarding losses and chargebacks within the Bank Card Division. The results of the review shall be analyzed by the committee referred to in Paragraph 5(c). A deficiency in the allowance 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 allowance for losses generated by the Bank Card Division consistent with the written policy governing the Bank Card Division. Such policy and its implementation shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.5] 8. (a) During the life of this ORDER, the Bank shall not increase its average assets by more than 10% during any one-year period without receiving prior written approval by the Regional Director and the Commissioner. In no event shall asset growth result in noncompliance with the capital maintenance provisions of Paragraph 2 of this ORDER without receiving the prior written approval of the Regional Director.
   (b) During the life of this ORDER, without receiving the prior written approval of the Regional Director, the Bank shall limit growth of the Bank Card Division as follows: for the first year of the ORDER, the Bank shall limit growth in average monthly processing, as calculated quarterly, to an annual amount which does not exceed 10% of the average monthly processing for the quarter ended December 31, 1997. Beginning with the quarter ended March 31, 1999, and thereafter for the life of this ORDER, the average monthly processing, as calculated quarterly, shall be measured against the same quarter for the prior year ("base quarter") and be limited to an annual amount which does not exceed 10% of the base quarter's average monthly processing.
   9. Beginning with the effective date of this ORDER, the Bank Card Division shall not extend or increase, directly or indirectly, processing caps to classified merchants.
   10. Within 60 days of the effective date of this ORDER, the Bank shall prepare and submit to the Regional Director a written business/strategic plan covering the Bank Card Division. Such plan shall include strategic goals for the diversification of the Bank's product lines, thereby reducing reliance on income generated by the Bank Card Division. In addition, such plan shall focus on restricting future growth of the Bank Card Division to the level set forth in Paragraph 8(b). The plan and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner.

   [.6] 11. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all alleged violations of laws which are more fully set out on Pages 36, 37 and 38 of the Report of Examination of the Bank as of August 11, 1997. In addition, the bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.
   12. The Bank shall not pay cash dividends without the prior written consent of the Regional Director and the Commissioner.
   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, statement, or notice shall be sent to the FDIC, Registration and Disclosure Section, 55-17th Street, N.W., Washington, D.C. 20429, at least fifteen (15) days prior to dissemination to shareholders. Any changes re- {{4-30-98 p.C-4476}}quested 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 Commissioner 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 corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner 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.
   Pursuant to delegated authority.
   Dated at San Francisco, California, this 4th day of February, 1998.

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