(This order terminated by order of the FDIC issued 3-13-03; see ¶16,332.)
[.1] Management—Qualifications Specified
[.2] Capital—Increase Required
[.3] Assets—Adversely Classified Assets—Reduction Required
[.4] Loans—Extensions of Credit—To Borrowers with Existing Adversely
Classified Credits
[.5] Loan Policy—Preparation or Revision of Policy Required
[.6] Loan Loss Reserve—Policy for Determining Accuracy of
[.7] Bank Operations—Overhead Expenses, Control of
[.8] Bank Operations—Compliance with State Law Required
[.9] Bank Operations—Expansion Restricted
[.10] Dividends—Dividends Restricted
[.11] Bonuses—Bonuses Restricted
[.12] Bank Operations—Employee Compensation Program—Review
[.13] Shareholders—Disclosure of Cease and Desist Order Required
In the Matter of
SOUTHERN PACIFIC BANK
TORRANCE, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-00-138b
Southern Pacific Bank, Torrance, 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 13, 2000, whereby
solely for the purpose of this pro
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ceeding 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 violations 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 as more fully described in the Report of Examination
dated June 26, 2000:
(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;
(d) operating with an inadequate allowance for loan and lease losses;
(e) following hazardous lending and lax collection practices that
expose the Bank to a level of risk; and
(f) operating in such a manner as to produce operating losses.
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 improving
asset quality, improving earnings, and who will restore the Bank to a
sound condition. 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 senior officers in Coast Business Credit
Division ("CBC") with appropriate lending, collection, and loan
supervision experience to upgrade and improve CBC's 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") 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) On or before March 31, 2001, the Bank shall obtain an equity
capital injection of no less than $19,000,000 (exclusive of the
$13,000,000 injected in November, 2000), and shall have Tier 1 capital
in such an amount as to equal or exceed eight (8.0) percent of the
Bank's total assets. Additionally, by that date, the Bank shall
achieve a total Risk Based Capital Ratio of no less than ten and
one-half (10.5) percent of total assets.
(b) On or before June 30, 2001, the Bank
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shall obtain an equity capital
injection of no less than $10,000,000, and shall have Tier 1 capital in
such an amount as to equal or exceed eight and one-half (8.5) percent
of the Bank's total assets. Additionally, by that date, the Bank shall
achieve a total Risk Based Capital Ratio of no less than eleven (11.0)
percent of total assets.
(c) On or before September 30, 2001, the Bank shall obtain an equity
capital injection of no less than $5,000,000, and shall have Tier 1
capital in such an amount as to equal or exceed eight and one-half
(8.5) percent of the Bank's total assets. Additionally, by that date,
the Bank shall achieve a total Risk Based Capital Ratio of no less than
eleven and one-half (11.5) percent of total assets.
(d) On or before December 31, 2001, the Bank shall obtain an equity
capital injection of no less than $5,000,000, and shall have Tier 1
capital in such an amount as to equal or exceed nine (9.0) percent of
the Bank's total assets. Additionally, by that date, the Bank shall
achieve a total Risk Based Capital Ratio of no less than twelve (12.0)
percent of total assets.
(e) The level of Tier 1 capital to be maintained during the life of
this ORDER pursuant to Subparagraphs 2(a) through 2(d) 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.
(f) 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 within limits
prescribed in Part 325, Appendix B of the FDIC Rules and Regulations
(12 C.F.R. Part 325, Appendix B); or
(iii) the exchange of outstanding subordinated debt issued by the Bank
for noncumulative perpetual preferred stock within the limits of Part
325, Appendix B of the FDIC Rules and Regulations (12 C.F.R. Part 325,
Appendix B); or
(iv) the direct contribution of cash by the Board of Directors, the
shareholder, and/or parent holding company; or
(v) any other means acceptable to the Regional Director and the
Commissioner of the California Department of Financial Institutions
("Commissioner"); or
(vi) 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.
(g) 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, 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
for prior approval.
(h) 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
fur
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nished 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.
(i) For the purposes of this ORDER, the terms "Tier 1 capital,"
"total assets" and "total risk based capital ratio" shall
have the meanings ascribed to them in Part 325 of the FDIC Rules and
Regulations, 12 C.F.R. §\s 325.2(t), 325.2(v), and 325.2(w),
respectively.
[.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" and one-half of the assets classified
"Doubtful" dated June 26, 2000, 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 March 31, 2001, the Bank shall have reduced the assets
classified "Substandard" and those assets classified
"Doubtful" dated June 26, 2000 that have not previously been
charged off to not more than $90,000,000.
(c) By June 30, 2001, the Bank shall have reduced the assets classified
"Substandard" and those assets classified "Doubtful" dated
June 26, 2000 that have not previously been charged off to not more
than $70,000,000.
(d) By September 30, 2001, the Bank shall have reduced the assets
classified "Substandard" and those assets classified
"Doubtful" dated June 26, 2000 that have not previously been
charged off to not more than $50,000,000.
(e) The requirements of Subparagraphs 3(a), 3(b), 3(c) and 3(d) 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), and 3(e) the word "reduce" means:
(i) to collect;
(ii) to charge-off; or
(iii) to sell an asset to an unaffiliated party, provided that any loss
realized by the Bank shall be properly reflected in the Bank's
financial statements; or
(iv) to sufficiently improve the quality of assets adversely classified
to warrant removing any adverse classification, as determined by the
FDIC at onsite examinations.
[.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" 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.
(b) Additionally, during the life 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" and is uncollected.
(c) Paragraph 4(b) shall not apply if the Bank's failure to extend
further credit to a particular borrower would be detrimental to the
best interests of the Bank. Prior to the extending of any additional
credit pursuant to this Paragraph, either in the form of a renewal,
extension, or further advance of funds, such additional credit shall be
approved by a majority of the Board of Directors, or a designated
committee thereof, who shall certify, in writing:
(i) why the failure of the Bank to extend such credit would be
detrimental to the best interests of the Bank;
(ii) that the Bank's position would be improved thereby; and
(iii) how the Bank's position would be improved.
The signed certification shall be made a part of the minutes of
the Board of Directors or designated committee, and a copy of the
signed certification shall be retained in the borrower's credit file.
[.5] 5. 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 as determined at subsequent
examinations.
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Such policy shall include, without being limited to:
(i) a loan charge-off policy which recognizes loan losses in a
timely manner;
(ii) a policy for placing loans on nonaccrual status;
(iii) an internal loan classification system;
(iv) a policy which prevents over advances on collateral without senior
loan committee approval;
(v) a policy which excludes the foreclosure or transfer of companies to
their parties, except where stock is held as collateral, as more fully
described and discussed in the FDIC's Report of Examination dated June
26, 2000;
(vi) a policy which includes Bank officer lending limits and requires
loan approval by the Bank's senior loan committee and the Board of
Directors above those lending limits; and
(vii) a policy which requires all lending, renewals, and loan
resolution strategies to be reported by CBC management to the Bank's
chief executive officer.
[.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
within thirty (30) days subsequent to 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.
[.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 in a form and
manner acceptable to the Regional Director as determined at subsequent
examinations and/or visitations.
[.8] 8. Upon the effective date of this ORDER, the Bank shall take all
necessary steps to ensure future compliance with all applicable laws
and regulations. Such future compliance shall include, among other
things, compliance with State Banking Law applicable to industrial
banks including State Senate Bill 2148 which became effective on
September 29, 2000, to be codified in the California Financial Code.
[.9] 9. The Bank shall not engage in any new lines of business without the
prior written consent of the Regional Director and the Commissioner.
[.10] 10. The Bank shall not pay cash dividends or make other shareholder
distributions without the prior written consent of the Regional
Director. Distribution, as used in this paragraph, does not include
interest on subordinated debt.
[.11] 11. The Bank shall not pay bonuses to executive officers without the
prior written consent of the Regional Director.
[.12] 12. Within 90 days from the effective date of this ORDER, the Bank
shall adopt a comprehensive employee compensation plan after
undertaking a review of compensation paid to any of the Bank's
executive officers. At a minimum, the review shall include the
following:
(a) a critical analysis of each Senior Vice President's, and
above, background, experience, duties and responsibilities, and an
appraisal of each individual's performance compared to the present
level of compensation;
(b) a comparison of each officer's total compensation with
compensation received by officers with similar responsibilities in
similar institutions; and
(c) a determination of whether present executive officers are capable
of implementing Board directives and policies, operating within the
constraints of laws and regulations, and operating the Bank in a
prudent manner.
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For the purposes of this paragraph, "compensation" refers to
any and all salaries, bonuses, and other benefits of every kind and
nature whatsoever, whether paid directly or indirectly. The
compensation plan and its implementation shall be in a form and manner
acceptable to the Regional Director as determined at subsequent
examinations and/or visitations.
As used in the Order, the term "executive officer" is as
defined in Regulation O of the Federal Reserve Board 12 C.F.R.
§215.2(e)(1).
[.13] 13. Following the effective date of this ORDER, the Bank shall send to
its shareholder 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.
14. Within 45 days of the end of the first quarter following the
effective date of this ORDER, and within forty-five (45) 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 the corrections required by the 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 15th day of December, 2000.
