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   [11,683] In the Matter of Bank of Lakewood, Lakewood, California, Docket No. 99-132b (12-22-99)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 4-30-02; see ¶16,308.)

   [.1] Management—Qualifications Specified
   [.2] Board of Directors—Responsibilities of Directors Specified
   [.3] Assets—Tier 1 Capital
   [.4] Assets—Adversely Classified Assets—Reduction Required
   [.5] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits
   [.6] Loan Loss Reserve—Policy for Determining Adequacy of
   [.7] Bank Operations—Overhead Expenses, Control of
   [.8] Strategic Plan—Preparation of Required
   [.9] Violations of Law—Correction of Violations Required
   [.10] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required
   [.11] Interest Rate Management System—Preparation Required
   [.12] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of
BANK OF LAKEWOOD
LAKEWOOD, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO
CEASE AND DESIST

FDIC-99-132b

   Bank of Lakewood, Lakewood, 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 December 14, 1999, 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 and unsound banking practices and violation of laws and/or regulations:
   (a) operating with inadequate management, as of the date of the Report of Examination dated June 28, 1999;
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   (b) operating with inadequate board supervision;
   (c) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Bank;
   (d) operating with a large volume of poor quality loans;
   (e) operating with an inadequate allowance for loan and lease losses;
   (f) following inadequate lending and collection practices;
   (g) operating with inadequate provisions for liquidity and funds management;
   (h) operating with inadequate internal routine and controls;
   (i) operating in such a manner as to produce negative earnings;
   (j) operating with inadequate management of interest rate risk; and
   (k) operating in violation of Sections 326.2, 326.4 and 326.8(c)(3) of the FDIC Rules and Regulations, 12 C.F.R. §§326.2, 326.4, and 326.8(c)(3), as more fully described on page 47 of the Report of Examination dated June 28, 1999; Sections 350.4(d) and 350.6 of the FDIC Rules and Regulations, 12 C.F.R. §§350.4(d) and 350.6, as more fully described on page 47 of the Report of Examination dated June 28, 1999; Sections 206.4(a), 206.5(a) and 206.5(b) of Regulation F of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§206.4(a), 206.5(a) and 206.5(b), made applicable to state nonmember institutions by 12 C.F.R. §206.2(a), as more fully described on page 48 of the Report of Examination dated June 28, 1999; and the Joint Agency Policy Statement on Interest Rate Risk and Guidelines for Compliance with the Federal Bank Bribery Law, as more fully described on pages 48 and 49 of the Report of Examination dated June 28, 1999.
   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 requiring particular attention. 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.

   [.2]2. Upon the effective date of this ORDER, the board of directors of the Bank 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 all bank activities, 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 the following areas will be reviewed and approved: reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity; liquidity and funds management, investments, operating policies; and individual committee {{2-29-00 p.C-4854}}actions. Board minutes shall document these reviews and approvals, including the names of dissenting directors. In addition:
   (a) Within 30 days from the effective date of this ORDER, the board of directors will increase its supervision of its delegated board committees and ensure that these committees adequately fulfill their responsibilities.
   (b) Within 90 days from the effective date of this ORDER, the board of directors will implement comprehensive risk management policies, programs, and systems to enable it to proactively identify, monitor, and manage risk. Such programs and systems will specifically correct internal routines and control deficiencies noted in the June 28, 1999 Report of Examination and shall take all necessary steps to ensure future compliance with all bank policies and procedures, and applicable laws and regulations.
   (c) Within 30 days from the effective date of this ORDER, the board of directors shall comply with any outstanding enforcement actions.
   (d) Within 30 days from the effective date of this ORDER, the board of directors shall ensure that regulatory, external, and internal audit exceptions and criticisms are addressed and corrected.
   (e) Within 30 days from the effective date of this ORDER and throughout the life of this ORDER, the board of directors shall seek and ensure that it receives complete and accurate information from management regarding the operations and financial condition of the Bank.

   [.3]3. (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) Within 60 days from the effective date of this ORDER, the Bank shall achieve and, thereafter during the life of the ORDER, maintain risk-based capital ratios sufficient to meet the definition of "well-capitalized" set forth in subsections 325.103(b)(1)(i) and 325.103(b)(1)(ii) of the FDIC Rules and Regulations, 12 C.F.R. §§325.103(b)(1)(i) & 325.103(b)(1)(ii).
   (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 allowance for loan and lease losses, the adequacy of which shall be satisfactory to the Regional Director 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) any other means acceptable to the Regional Director; or
       (iv) 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 allowance for loan and lease losses.
   (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 con- {{5-31-03 p.C-4855}}ditions relative to interest rate and convertibility factor, shall be presented to the Regional Director 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" and one-half of the assets classified "Doubtful" as of June 28, 1999, 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 classified "Substandard" and the remaining fifty percent (50%) of assets classified as "Doubtful" as of June 28, 1999, to not more than five hundred thousand dollars ($500,000.00).
   (c) Within 240 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and the remaining fifty percent (50%) of assets classified as "Doubtful" as of June 28, 1999, to not more than three hundred thousand dollars ($300,000.00).
   (d) The requirements of subparagraphs 4(a), 4(b) and 4(c) 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 subparagraph 4(b), 4(c), and 4(d) 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 at subsequent on site examinations and/or visitations.
   [.5]5. 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" or "Doubtful" and is uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.

   [.6]6. Within 30 days from the effective date of this ORDER, the board of directors shall review the adequacy of the allowance for loan and lease losses and establish 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 following the end of each quarter, in order that the findings of the board of directors with respect to the allowance for loan and lease losses 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.
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   [.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 restore the Bank's profitability. The plan shall be submitted to the Regional Director and shall be in a form and manner acceptable to the Regional Director.

   [.8]8. Within 60 days of the effective date of this ORDER, the bank shall develop a written, three-year strategic plan. Such plan shall include specific goals for the dollar volume of total loans, total investment securities, and total deposits as of June 30, 2000, December 31, 2000, December 31, 2001, and December 31, 2002. Such plan shall include the underlying documentation in support of each specific goal. For each time frame, the plan shall also specify the anticipated average maturity and average yield on loans and securities; the average maturity and average costs of deposits; the level of earning assets as a percentage of total assets; and the ratio of net interest income to average earning assets. The plan shall be submitted to the Regional Director and shall be in a form and manner acceptable to the Regional Director.

   [.9]9. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violation of laws and violations of Statements of Policy which are more fully set out on pages 47 and 48 of the Report of Examination of the Bank as of June 28, 1999. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.10]10. Upon the effective date of this ORDER, the Bank shall adequately implement a written liquidity and funds management policy. Such implementation shall include increased monitoring and oversight of the Bank's liquidity position and funds management. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director.

   [.11]11. Within 60 days of the effective date of this ORDER, the Bank shall revise, adopt, and implement an interest rate risk management plan. At a minimum, such plan shall address all criticisms as set forth on pages 34 and 35 of the Report of Examination as of June 28, 1999. Such plan and its implementation shall be in a form and manner acceptable to the Regional Director.

   [.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, 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.]On the 30th day following the end of every calendar quarter, 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 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.
   Pursuant to delegated authority.
   Dated at San Francisco, California, this 22nd day of December, 1999.

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