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FDIC Enforcement Decisions and Orders

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   [11,747] In the Matter of Southern Pacific Bank, Torrance, California, Docket No. 00-138b (12-15-00)

   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 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.

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