Federal Deposit
Insurance Corporation

{{7-31-95 p.C-2301}}
   [¶10,540] In the Matter of Bank of Westminster, Westminster, California, Docket No. FDIC-92-143b (5-20-92).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate management; operating with inadequate capital and reserves; operating with an excessive level of poor quality assets; operating with inadequate allowance for loan and lease losses; operating with inadequate provisions for funds management; operating without proper internal routine and controls; operating in such a manner as to produce low earnings; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 5-18.95. See ¶ 16,004.)
   [.1] Management—Qualifications—Review
   [.2] Board of Directors—Meetings—Frequency
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Assets—Hotel—Disposal of Interest Required
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Lending and Collection Policy—Minimum Requirements
   [.8] Consumer Laws—Compliance Program
   [.9] Loans—Concentrations of Credit—Risk Segmentation Analysis
   [.10] Loan Loss Reserve—Establish/Maintain
   [.11] Bank Operations—Overhead Expenses
   [.12] Violations of Law—Eliminate/Correct
   [.13] Asset/Liability Management—Written Policy—Minimum Requirements
   [.14] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.15] Reports of Condition and Income—Amendment Required
   [.16] Dividends—Restricted
   [.17] Management—Comprehensive Review Required
   [.18] Compensation—Bonuses—FDIC Approval Required
   [.19] Brokered Deposits—Report to FDIC Required
   [.20] Shareholders—Disclosure—Cease and Desist Order
   [.21] Real Estate Activities—Compliance with State Law Required
   [.22] Compliance Reports—Frequency
   [.23] Institution-Affiliated Parties—Disclosure—Cease and Desist Order

In the Matter of

BANK OF WESTMINSTER
WESTMINSTER, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Bank of Westminster, Westminster, 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 the alleged charges under section 8(b)(1) of the {{7-31-95 p.C-2302}}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 May 13, 1992, 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, and any institution-affiliated party as such term is defined in section 3(u) of the Act, 12 U.S.C. 1813(u), cease and desist from the following unsafe or unsound banking practices and violations:

   (a) operating with inadequate management;
   (b) operating with marginal equity capital and inadequate reserves in relation to the volume and quality of assets held by the Bank;
   (c) operating with a large volume of poor quality assets;
   (d) operating with an inadequate loan valuation reserve;
   (e) operating with inadequate provisions for funds management;
   (f) operating with inadequate routine and controls policies;
   (g) operating in such a manner as to produce low earnings;
   (h) operating in violation of sections 215.4(b)(1), 215.4(c), and 215.4(d) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.4(b)(1), 215.4(c), and 215.4(d), made applicable to state nonmember institutions by section 18(j)(2) of the Act, 12 U.S.C. 1828(j)(2), as more fully described on pages 6-b, 6-b-1 and 6-b-2 of the Report of Examination of the Bank as of October 1, 1991; section 751.3 of the California Financial Code, as more fully described on page 6-b-2 of the Report of Examination of the Bank as of October 1, 1991; and Parts 323 and 350 of the FDIC Rules and Regulations, 12 C.F.R. §§ 323 and 350, as more fully described on pages 6-b-2 and 6-b-3 of the Report of Examination of the Bank as of October 1, 1991; and
   (j) operating in violation of section 226.17 of Regulation Z of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 226.17, as more fully described on page 2 of the Compliance Report of Examination of the Bank as of October 21, 1991; sections 339.3, 339.5, and 339.6 of the FDIC's Rules and Regulations, 12 C.F.R. §§ 339.3, 339.5, and 339.6, as more fully described on page 2 of the Compliance Report of Examination of the Bank as of October 21, 1991; section 329.1 of the FDIC Rules and Regulations, 12 C.F.R. § 329.1, as more fully described on page 2-a of the Compliance Report of Examination of the Bank as of October 21, 1991; section 202.9 of Regulation B of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 202.9, as more fully described on page 2-a of the Compliance Report of Examination of the Bank as of October 21, 1991; section 338.4 of the FDIC Rules and Regulations, 12 C.F.R. § 338.4, as more fully described on page 2-a of the Compliance Report of Examination of the Bank as of October 21, 1991; section 345.3 of the FDIC's Rules and Regulations, 12 C.F.R. § 345.3, as more fully described on page 2-a-1 of the Compliance Report of Examination of the Bank as of October 21, 1991; sections 229.10, 229.12, and 229.13 of Regulation CC of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 229.10, 229.12, and 229.13, as more fully described on page 2-a-1 of the Compliance Report of Examination of the Bank as of October 21, 1991; section 326.8 of the FDIC's Rules and Regulations, 12 C.F.R. § 326.8, as more fully described on page 2-a-2 of the Compliance Report of Examination of the Bank as of October 21, 1991.

   [.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 should include a chief executive officer with proven ability in managing a Bank of comparable size, and experience in improving earnings and other matters needing particular attention. Management should also include a senior lending officer with significant appropriate lending, collection, and loan supervision experience. 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.

   [.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 the formulation of sound policies and objectives and for the supervision of all of the Bank's activities. This participation shall include meetings to be held no less frequently than monthly, at which, at a minimum, the following areas are reviewed and approved: reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity; operating policies; and individual committee approvals, including the names of any dissenting directors.

   [.3] 3. (a) During the life of this ORDER, the Bank shall maintain Tier 1 capital in such an amount as to equal or exceed six and a half (6.5) percent of the Bank's total assets.
   (b) Within 60 days from the effective date of this ORDER, the Bank shall develop and adopt a plan to maintain capital above 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 2(a) shall be in addition to a fully funded loan loss reserve, the adequacy of which shall be satisfactory to the Regional Director and Superintendent 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 Superintendent; or
   (v) any combination of the above means.

   (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, 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 and the Superintendent 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(m) and 325.2(n), as amended at 56 Fed. Reg. 10154, effective April 10, 1991.

   [.5] 5. The Bank shall take all reasonable steps to dispose of its interest in the Hun- {{7-31-92 p.C-2305}}tington Suites Hotel within 120 days of the effective date of this ORDER.

   [.6] 6. (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" and is uncollected. Subparagraph 6(a) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with the Financial Accounting Standards Board Statement Number 15 ("FASB 15").
   (b) 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 classified, in whole or part, "Substandard" without the prior approval of a majority of the board of directors or the loan committee of the Bank. Subparagraph 6(b) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with FASB 15, providing that such renewal or extension shall be made only with the prior approval of a majority of the board of directors or the loan committee of the Bank.
   (c) In connection with subparagraphs 6(a) and 6(b) of this ORDER, the Bank shall not:

   (i) continue the accrual of interest on any loan which is delinquent in principal or interest payments ninety (90) days or more unless the asset is both well secured and in the process of collection; or
   (ii) engage in any practice or device which essentially avoids recognition of overdue loans and/or artificially inflates the income of the Bank. For any loans restructured in accordance with FASB 15, consideration should be given to the reasonableness of the modified terms of the loan, since loans should not be restructured in an attempt to conceal credit losses or delay their recognition.

   (i) collateral in the form of liens on or pledges of real or realizable value sufficient to discharge the debt (including accrued interest) in full; or
   (ii) the guaranty of a financially responsible party.

   [.7] 7. (a) 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, which policies shall include specific guidelines for placing loans on a non-accrual basis. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
   (b) The initial revisions to the Bank's loan policy and practices, required by this paragraph, at a minimum, shall include the following:

   (i) provisions, consistent with FDIC instructions for the preparation of Reports of Condition and Income, under which the accrual of interest income is discontinued and previously accrued interest is reversed on delinquent loans;
   (ii) provisions which prohibit the capitalization of interest or loans related expense unless the board of directors supports in writing and records in the minutes of the corresponding board of directors meeting why an exception thereto is in the best interests of the Bank;
   (iii) provisions which require complete loan documentation, realistic repayment terms and current credit information adequate to support the outstanding indebtedness of the borrower. Such documentation shall include current fi- {{7-31-92 p.C-2306}}nancial information, profit and loss statements or copies of tax returns and cash flow projections;
   (iv) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values;
   (v) provisions which specify the circumstances and conditions under which real estate appraisals must be conducted by an independent third party;
   (vi) provisions which establish standards for unsecured credit;
   (vii) provisions which establish officer lending limits;
   (viii) provisions that require extensions of credit to any of the Bank's executive officers, directors, or principal shareholders, or to any related interest of such persons, to be in compliance with the provisions of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215;
   (ix) provisions which prohibit the issuance of standby letters of credit unless the letters of credit are fully secured by readily marketable collateral and/or are supported by current and complete financial information;
   (x) provisions that directors first determine that the lending staff has the expertise necessary to properly supervise construction loans and that adequate procedures are in place to monitor any construction involved before funds are disbursed;
   (xi) provisions which prohibit concentrations of credit in excess of 25 percent of the Bank's total equity capital and reserves to any borrower and that borrower's related interests;
   (xii) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans which are classified "Substandard" as of October 1, 1991 or by the FDIC or California State Banking Department in subsequent Reports of Examination and all other loans which warrant individual review and consideration by the board of directors as determined by the loan committee or active management. The loan "watch list" shall be presented to the board of directors for review at least monthly with such review noted in the minutes; and
   (xiii) the board of directors shall adopt procedures whereby officer compliance with the revised loan policy is monitored and responsibility for exceptions thereto assigned. The procedures adopted shall be reflected in minutes of a board of directors meeting at which all members are present and the vote of each is noted.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall perform a risk segmentation analysis with respect to the concentrations of credit concerning construction and land development loans listed on page 2-b of the Report of Examination of the Bank as of October 1, 1991. Concentrations should be identified by product type, geographic distribution, underlying collateral or other asset groups which are considered economically related and in the aggregate represent a large portion of the Bank's capital account. A copy of this analysis will be provided to the Regional Director and the Superintendent and the board agrees to develop a plan to reduce any segment of the portfolio which the Regional Director and Superintendent deem to be an undue concentration of credit in relation to the Bank's capital account. The plan and its implementation shall be in a form and manner acceptable to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

   [.10] 10. Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for loan losses.
   Additionally, within 60 days from the effective date of this ORDER, the board of directors shall develop or revise, adopt and implement a comprehensive policy for determining the adequacy of the reserve for loan losses. For the purpose of this deter- {{7-31-92 p.C-2307}}mination, the adequacy of the reserve shall be determined after the charge-off of all loans or other items classified "Loss." The policy shall provide for a review of the reserve at least once each calendar quarter. Said review should be completed at least ten (10) days prior to the due date of each Report of Condition, in order that the findings of the board of directors with respect to the loan loss reserve 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 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 reserve 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 loss reserve consistent with the loan loss reserve policy established. Such policy and its implementation shall be satisfactory to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

   [.11] 11. 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 improve the Bank's profitability. The plan shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.12] 12. Within 120 days from the effective date of this ORDER, the Bank shall take all reasonable steps to eliminate and/or correct all violations of law which are more fully set out on pages 6-b through 6-b-3 of the Report of Examination of the Bank as of October 1, 1991. The Bank shall also take all reasonable steps to eliminate and/or correct all violations of law which are more fully set out in the Compliance Report of Examination as of October 21, 1991. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.13] 13. Within 90 days from the effective date of this ORDER, the board of directors shall develop a comprehensive asset/ liability management policy. Such policy shall be submitted to the Regional Director and the Superintendent for comments as to its acceptability, and its implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent. The policy shall establish standards consistent with generally accepted prudent banking operations by giving specific consideration to:

   (i) establishing a range for the Bank's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination;
   (ii) establishing a range for short-term investments to potentially volatile liabilities, as those terms are defined by the FDIC in its current edition of "A Users Guide for the Uniform Bank Performance Report";
   (iii) establishing maturity ranges for the Bank's investment portfolio;
   (iv) establishing acceptable ranges for the Bank's rate sensitivity and gap ratios; and
   (v) the establishing of an asset/ liability committee, including a description of its responsibilities, how often it will meet, how it will obtain information and guidance from the board of directors, and how its activities will be reported to the board of directors.

   [.15] 15. Within 10 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 as of December 31, 1991. Bank should also file amended Consolidated Reports of Condition and Income as requested on page 1-a-4 of the Report of {{7-31-92 p.C-2308}}Examination as of October 1, 1991. 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 State Banking Department or FDIC examination of the Bank during that reporting period.

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

   [.17] 17. Within 60 days of the date of this ORDER, the Bank shall review and study the current director and executive officer compensation packages and organizational structure. This review and study shall be acceptable to the Regional Director and shall include the following:

   (a) a critical analysis of each individual's duties and responsibilities, and an appraisal of each individual's performance compared to the present level of compensation;
   (b) a determination of whether the present management team is capable of implementing board directives, operating within the constraints of laws and regulations, and operating the Bank in a prudent manner;
   (c) the development of comprehensive job descriptions; and
   (d) the development of an organizational chart to delineate formal lines of communication and reporting. A copy of the board's findings and a summary of the conclusions shall be provided to the Regional Director upon completion of the study. For the purpose 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.

   [.19] 19. While this ORDER is in effect, the Bank shall give written notice to the Regional Director and the Superintendent at such time as the Bank intends to make use of brokered deposits. The notification should indicate how the brokered deposits are to be utilized with specific reference to credit quality of investments/loans and the effect on the Bank's funds position and asset/liability matching. The Regional Director and the Superintendent shall have the right to reject the Bank's plans for utilizing brokered deposits. For purposes of this ORDER, brokered deposits are defined as described in section 337.6(a)(1) of the FDIC Rules and Regulations.

   [.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, Registration and Disclosure 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. During the life of this ORDER, the Bank shall not engage, directly or indirectly, in any real estate activities subject to section 751.3 of the California Financial Code, Cal. Fin. Code § 751.3 (West 1989).

   [.22] 22. Within 45 days of the end of the first quarter following the effective date of this ORDER, and within thirty (45) days of the end of each quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Superintendent 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 Superintendent have released the Bank in writing from making further reports.

   [.23] 23. Following the effective date of this ORDER, the Bank shall send to or otherwise furnish a description of this ORDER to all institution-affiliated parties as such term is defined in section 3(u) of the Act, 12 U.S.C. 1813(u). The description shall fully {{4-30-95 p.C-2309}}describe the ORDER in all material respects.
The provisions of this ORDER shall be binding upon the Bank and any institution-affiliated party of the Bank.
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.
Dated at San Francisco, California, this 20th day of May, 1992.
   Pursuant to delegated authority.