Federal Deposit
Insurance Corporation

   [¶12,116] In the Matter of California Oaks State Bank, Thousand Oaks, California, Docket No. 03-183b (10-20-03).

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent was engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 9-29-04; see ¶16,395.)

   [.1] Management—Qualifications Specified

   [.2] Board of Directors—Increase Participation in Bank Affairs Required

   [.3] Capital—Maintain Tier 1 Capital

   [.4] Assets—Charge-off or Collection

   [.5] Strategic Plan—Preparation of Required

   [.6] Profit Plan—Preparation of Plan Required

   [.7] Violations of Law—Corrections of Violations Required

   [.8] Bank Operations—Internal Review and Control Procedures—Establish

   [.9] Reports of Condition and Income—Amendment Required

   [.10] Dividends—Dividends Restricted

   [.11] Conflicts of Interest—Written Policy Required

   [.12] Wire Transfer Policy—Written Plan Required

   [.13] Audit—Written Policy Required

   [.14] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required

   [.15] Loan Policy—Preparation or Revision of Policy Required

   [.16] Audit—Independent Auditors Required

   [.17] Bank Secrecy Act—Compliance—Audit

   [.18] Audit—Financial Statements—Audit Required

   [.19] Audit—Forensic Audit Required

   [.20] Shareholders—Disclosure of Cease and Desist Order Required

   [.21] Progress Report—Written Report Required

In the Matter of
CALIFORNIA OAKS STATE BANK
THOUSAND OAKS, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-03-183b

   California Oaks State Bank, Thousand Oaks, 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 law and/or regulations alleged to have been committed by the Bank and of its right to a hearing on
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   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 October 14, 2003, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law 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 law and/or regulations. The FDIC, 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 violations of law and/or regulations:

   (a) operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;

   (b) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank;

   (c) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;

   (d) operating with a large volume of low quality non-earning assets;

   (e) operating in such a manner as to produce operating losses;

   (f) operating in violation of Part 326.8, 12 C.F.R. 326.8, and Part 353, 12 C.F.R. 353, of the FDIC's Rules and Regulations; operating in violation of 31 C.F.R. 103.18 of the Treasury Department's Regulations; operating in contravention of the Joint Policy Statement on Interest Rate Risk, and the Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions;

   (g) operating with inadequate internal routine and controls policies;

   (h) operating with inadequate loan, audit, and wire transfer policies;

   (i) operating with inadequate provisions and policies for funds management; and

   (j) operating with an inadequate conflict of interest policy.

   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, 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; a Chief Financial Officer with proven ability in supervising internal operations, providing sound internal controls, and insuring reliability of all financial reporting in a bank of comparable size. 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, liquidity, and sensitivity to market risk.

   (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 Commissioner, Department of Financial Institutions for the State of California ("Commissioner")
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   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.

   [.2]2. Within 30 days from the effective date of this ORDER, the board of directors 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 of the Bank's 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, at a minimum, the following areas shall be reviewed and approved: reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activities; operating policies; and individual committee actions. Board minutes shall document these reviews and approvals, including the names of any dissenting directors.

   [.3]3. (a) Within 30 days from the effective date of this ORDER, the Bank shall increase Tier 1 capital by no less than two million dollars ($2,000,000.00); as of December 31, 2003 the Bank shall have and maintain Tier 1 capital in such an amount as to equal or exceed six and one half (6.5) percent of the Bank's total assets; as of June 30, 2004 the Bank shall have Tier 1 capital in such an amount as to equal or exceed seven and one half (7.5) 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 and a half (7.5) percent of the Bank's total assets.

   (b) Within 30 days from the effective date of this ORDER, the Bank shall develop and adopt a plan to 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. 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 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 and Commissioner 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 and the Commissioner; 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, Accounting and Securities Section, 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
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   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 and the Commissioner 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" in the FDIC's Visitation Report dated June 30, 2003, 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.

   [.5]5. Within 90 days of the effective date of this ORDER, the Bank shall develop and submit to the Regional Director 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 December 31, 2003 and for each calendar quarter thereafter through December 31, 2006. For each time frame, the plan will also specify the anticipated average maturity and average yield on loans and securities; the average maturity and average cost 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 in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.6]6. Within 90 days from the effective date of this ORDER, the Bank shall formulate and implement a written profit plan. This plan shall be forwarded to the Regional Director and to the Commissioner for review and comment and shall address, at a minimum, the following:

   (a) goals and strategies for improving and sustaining the earnings of the Bank, including:

   (i) an identification of the major areas in, and means by which, the board of directors will seek to improve the Bank's operating performance:

   (ii) realistic and comprehensive budgets;

   (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and

   (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   (b) coordination of the Bank's loan, investment, and operating policies, and budget and profit planning, with the funds management policy.

   [.7]7. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law, and contraventions of policy which are more fully set out on pages 24-31 in the FDIC's Visitation Report dated June 30, 2003. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations, and shall adhere to all applicable policy statements.

   [.8]8. Within 30 days from the effective date of this ORDER, the Bank shall develop, adopt and implement a policy for the operation of the Bank in such a manner as to provide adequate internal routine and control policies consistent with safe and sound banking practices. Such policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitation.

   At a minimum the policy shall require the Bank to develop, adopt and implement an Operational Policies and Procedures Manual (OPPM). The OPPM should at a minimum address the operational, internal routine, and
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   audit deficiencies on pages 17-20 of the FDIC's Visitation Report dated June 30, 2003.

   Within 60 days of the effective date of this Order the Bank shall provide training to all operations personnel on the contents of the OPPM.

   [.9]9. Within 30 days after eliminating from its books any asset in compliance with Paragraph 4 of this ORDER, the Bank shall file with the FDIC amended Consolidated Reports of Condition and Income which shall accurately reflect the financial condition of the Bank in the FDIC's Visitation Report dated June 30, 2003. Thereafter, during the life of this ORDER, the Bank shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the end of the period for which the Reports are filed, including any adjustment in the Bank's books made necessary or appropriate as a consequence of any California Department of Financial Institutions or FDIC examination of the Bank during that reporting period.

   [.10]10. The Bank shall not pay cash dividends without the prior written consent of the Regional Director and the Commissioner.

   [.11]11. Within 60 days of the effective date of this Order the Bank shall develop, adopt, and implement a written conflict of interest policy. At a minimum the policy shall address appropriate safeguards and disclosures for transactions between members of the board of directors and/or employees of the Bank. Such policy shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.12]12. Within 60 days of the effective date of this Order the Bank shall revise, adopt, and implement a written wire transfer policy. At a minimum this policy shall address the concerns, and contain the recommendations on page 20 of the FDIC's Visitation Report dated June 30, 2003. Such wire transfer policy shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.13]13. Within 60 days of the effective date of this Order the Bank shall revise, adopt, and implement a written audit policy. At a minimum this policy shall address the deficiencies and contain the recommendations on page 21 of the FDIC's Visitation Report dated June 30, 2003. The policy shall also require the Audit Committee to meet at least monthly, and report the results of each meeting, including audit findings, follow up audits, and corrective actions, to the Board of Directors on a monthly basis. Such audit policy shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.14]14. Within 60 days of the effective date of this Order the Bank shall revise, adopt, and implement a written funds management policy. At a minimum this policy shall address the deficiencies and contain the recommendations on pages 15-16 of the FDIC's Visitation Report dated June 30, 2003. Such funds management policy shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.15]15. Within 60 days of the effective date of this Order the Bank shall revise, adopt, and implement a written loan policy. This policy shall also address the deficiencies described in the recommendations on pages 29-31 of the FDIC's Visitation Report dated June 30, 2003. Such policy shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.16]16. Within 60 days of the effective date of this Order the Bank shall obtain an audit of its operations area from an independent third party. The scope of the audit shall be in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.17]17. Within 60 days of the effective date of this Order the Bank shall obtain an audit of its Bank Secrecy Act (BSA) program from an independent third party. The scope of the audit shall be in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.18]18. Within 60 days of the effective date of this Order the Bank shall obtain an audit of its financial statements for the years 2001, and 2002, from an independent third party. The scope of the audit shall be in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.
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   [.19]19. Within 60 days of the effective date of this Order the Bank shall obtain a forensic audit of all deposit accounts of former Bank employee Kevin Jillson, active, inactive, or closed, from an independent third party. The scope of the forensic audit shall be in a form and manner acceptable to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.

   [.20]20. 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, Accounting and Securities Section, 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.

   [.21]21. Within 45 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 the 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 20th day of October, 2003.