Federal Deposit
Insurance Corporation

{{4-30-93 p.C-2557}}
   [¶10,602] In the Matter of American Valley Bank, El Cajon, California, Docket No. FDIC-92-237b (7-21-92.

   Bank to cease and desist from such unsafe or unsound practices as failing to provide adequate supervision over the Bank's affairs; operating with inadequate management; operating with inadequate capital; operating with excessive volumes of adversely classified assets; operating without adequate reserve for loan losses; following hazardous lending and lax collection practices; operating with inadequate liquidity and funds management; operating in such a manner as to produce operating losses; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 1-26-93; see ¶ 15,592.)

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   [.1] Board of Directors—Supervision of Bank—Meetings
   [.2] Management—Qualifications—Review
   [.3] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Lending and Collection Policy—Minimum Requirements
   [.7] Loans—Concentrations of Credit—Reduction Plan
   [.8] Loan Loss Reserve—Establish/Maintain
   [.9] Strategic Plan—Preparation Required
   [.10] Profit Plan—Minimum Requirements
   [.11] Funds Management—Written Policy Required
   [.12] Bank Holding Company—Relationship With—Policy Required
   [.13] Dividends—Restricted
   [.14] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.15] Violations of Law—Eliminate/Correct
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Real Estate Activities—FDIC Consent Required
   [.18] Compliance Reports—Frequency

In the Matter of

AMERICAN VALLEY BANK
EL CAJON,CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-237b
   American Valley Bank, El Cajon, 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 law 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 July 16, 1992, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violation of law, 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 a violation of Law. 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:
   (a) operating with inadequate supervision by the board of directors;
   (b) operating with inadequate management;
   (c) operating with inadequate equity capital in relation to the volume and quality of assets held by the Bank;
   (d) operating with a large volume of poor quality loans;
   (e) operating with an inadequate loan valuation reserve;
   (f) following hazardous lending and lax collection practices;
   (g) operating with inadequate provisions for liquidity and funds management; {{9-30-92 p.C-2559}}
   (h) operating with inadequate routine and controls policies;
   (i) operating in such a manner as to produce operating losses; and
   (j) operating in violation of section 23B of the Federal Reserve Act, 12 U.S.C. § 371c, made applicable to state nonmember banks by section 18(j)(1) of the Act, 12 U.S.C. § 1828(j)(1).
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:    [.1] 1. 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 revised and approved: reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity; operating policies; and individual committee actions. Board minutes shall document there reviews and approvals, including the names of any dissenting directors.

   [.2] 2. 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 upgrading a low quality loan portfolio, 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 and experience in upgrading a 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") and the Superintendent of Banks for the State of California ("Superintendent") 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.

   (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, shareholders, and/or parent holding company; or
   (iv) any other means acceptable to the Regional Director and the Superintendent; or
   (v) any combination of the above means.

[.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" as of December 31, 1991, 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) As of December 31, 1992, the Bank shall have reduced the assets classified "Substandard" as of December 31, 1991 that have not previously been charged off to not more than one hundred fifty percent {{9-30-92 p.C-2561}}(150%) of Total Capital plus Ineligible Portion of Loan Loss Reserve.
   (c) As of June 30, 1993, the Bank shall have reduced the assets classified "Substandard" as of December 31, 1991 that have not previously been charged off to not more than one hundred percent (100%) of Total Capital plus Ineligible Portion of Loan Loss Reserve.
   (d) As of December 31, 1993, the Bank shall have reduced the assets classified "Substandard" as of December 31, 1991 that have not previously been charged off to not more than seventy five percent (75%) of Total Capital plus Ineligible Portion of Loan Loss Reserve.
   (e) The requirements of subparagraphs 4(a), 4(b), 4(c), and 4(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 to the same or related borrowers is not considered collection for the purpose of this paragraph. As used in subparagraphs 4(b), 4(c), 4(d) and 4(e) the word "reduce" means:

   (i) to collect;
   (ii) to charge-off; or
   (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.

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

   (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.

[.6] 6. (a) Within 90 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 loan 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 financial 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 lending limits;
   (vii) provisions relating to real estate development loans which address requirements for feasibility studies and cash flow analysis, minimum cash equity positions, take-out commitments, the use of interest reserves and negative amortization, and appraisal analysis;
   (viii) provisions which require a semiannual analysis of the potential impact of a sustained downturn in the real estate market;
   (ix) 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;
   (x) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $25,000 which are classified "Substandard" as of December 31, 1991 or by the FDIC or the 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
   (xi) the board of directors shall adopt procedures whereby officer compliance with the revised loan policy is monitored and responsibility for exceptions {{9-30-92 p.C-2563}}thereto assigned. The procedures adopted shall be reflected in the minutes of a board of directors meeting at which all members are present and the vote of each is noted.

   [.8] 8. Within 10 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 review the adequacy of the reserve for loan losses and establish a comprehensive policy for determining the adequacy of the reserve for loan losses. For the purpose of this determination, 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 end of each quarter, 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.

   [.9] 9. 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, 1992, December 31, 1993, and December 31, 1994. 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 as determined at subsequent examinations and/or visitations.

   [.10] 10. Within 90 days from the effective date of this ORDER, the Bank shall formulate and implement a written profit plan. This plan shall be acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations 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.

   [.12] 12. Within 90 days from the effective date of this ORDER, the Bank shall develop, adopt, and implement a written policy satisfactory to the Regional Director and the Superintendent, which policy shall govern the relationship between the Bank and its holding company. The policy shall limit the payment of any management, consulting, or other fees or funds of any nature, directly or indirectly, to or for the benefit of the Bank's holding company to only those fees or funds paid in connection with services performed by the Bank's holding company on behalf of or for the benefit of the Bank.

   [.13] 13. The Bank shall not pay cash dividends in any amount except as follows:

   (a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
   (b) that after payment of such dividends, the ratio of Adjusted Tier 1 capital to total assets of the Bank will be not less than six (6.0) percent and the reserve for loan losses shall be at an adequate level;
   (c) that such declaration and payment of dividends shall be approved in advance by the board of directors; and
   (d) that such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director and the Superintendent, which approval shall not be unreasonably withheld.

   [.15] 15. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct the violations of law, to the extent legally possible, which are more fully described on page 6-1 of the Report of Examination of the Bank as of December 31, 1991. In addition, the Bank shall take all steps necessary to ensure future compliance with all applicable laws and regulations.

   [.16] 16. 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 describe the ORDER in all material respects.

   [.17] 17. During the life of this ORDER, the Bank shall not make any additional investments in existing real estate ventures or invest in any new real estate ventures pursuant to Section 751.3 of the California Financial Code without the prior written consent of the Regional Director and the Superintendent.

   [.18] 18. Within 30 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 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.
   The provisions of this ORDER shall be binding upon 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), to include, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs 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 {{4-30-93 p.C-2565}} of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated at San Francisco, California, this 21st day of July, 1992.
   Pursuant to delegated authority.