Federal Deposit
Insurance Corporation

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   [¶10,604] In the Matter of The Bank of San Diego, San Diego, California, Docket No. FDIC-92-239b (7-21-92).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate supervision by the board of directors; operating with inadequate management; operating with inadequate capital; operating with excessive volumes of adversely classified assets; operating with adequate reserve for loan losses; following hazardous lending and lax collection practices; operating with excessive concentrations of credit; 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 1-28-94; see ¶ 15,800.)

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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] Allowance for Loan and Lease Losses—Establish/Maintain
   [.9] Profit Plan—Minimum Requirements
   [.10] Strategic Plan—Preparation Required
   [.11] Violation of Law—Eliminate/Correct
   [.12] Liquidity and Funds Management—Policy Required
   [.13] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.14] Reports of Condition and Income—Amendment Required
   [.15] Bank Holding Company—Relationship With—Policy Required
   [.16] Dividends—Restricted
   [.17] Real Estate Activities—Notice to FDIC Required
   [.18] Compliance Reports—Frequency
   [.19] Institution-Affiliated Parties—Disclosure—Cease and Desist Order
   [.20] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

THE BANK OF SAN DIEGO
SAN DIEGO, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-239b
   The Bank of San Diego, San Diego, 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 laws, rules, 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 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 violations of laws, rules, 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, rules, 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:
   (a) operating with inadequate supervision by the board of directors;
   (b) operating with inadequate management;
   (c) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Bank;
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   (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;
   (h) operating with excessive concentrations of credit;
   (i) operating with inadequate routine and controls policies;
   (j) operating in such a manner as to produce operating losses; and
   (k) operating in violation of the following laws, rules, and/or regulations:

   (i) Section 23A and 23B of the Federal Reserve Act, made applicable to state non-member institutions by Section 18(j)(1) of the Federal Deposit Insurance Act, and as more fully described on Pages 6-b-1 and 6-b-3 of the Report of Examination as of December 31, 1991;
   (ii) Section 22(h) of the Federal Reserve Act, made applicable to state non-member institutions by Section 18(j)(4) of the Federal Deposit Insurance Act, and as more fully described on Page 6-b of the Report of Examination as of December 31, 1991;
   (iii) Section 215.4 of [A] of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4, made applicable to state nonmember institutions by Section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2), and as more fully described on Page 6-b of the Report of Examination as of December 31, 1991;
   (iv) Section 323.3 of the Rules and Regulations of the FDIC, and as more fully described on Page 6-b-1 of the Report of Examination as of December 31, 1991;
   (v) Section 325 of the Rules and Regulations of the FDIC, and as more fully described on Page 6-b-2 of the Report of Examination as of December 31, 1991; and
   (vi) Section 3354(b) of the California Financial Code, Cal. Fin. Code § 3354(b) (West 1989), and as more fully described on Page 6-b-2 of the Report of Examination as of December 31, 1991.

   [.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 reviewed 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 these 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, with experience in upgrading a low quality loan portfolio, and with the specific responsibility for collecting or reducing the overall volume of adversely classified real estate loans as reflected in the December 31, 1991, Report of Examination of the Bank. 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, earn- {{9-30-92 p.C-2575}}ings, management effectiveness, and liquidity.

[.3] 3. (a) The Bank shall have Adjusted Tier 1 capital in such an amount as to equal or exceed five and one-half (5.5) percent of the Bank's total assets by December 31, 1992 and six (6.0) percent of the Bank's total assets by March 31, 1993. Thereafter, during the life of this ORDER, the Bank shall maintain Adjusted Tier 1 capital in such an amount as to equal or exceed six (6.0) percent of the Bank's total assets.
   (b) Within 90 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 Adjusted 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 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 Adjusted 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) 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 (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), and 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 collections; or    (ii) engage in any practice or device which essentially avoids the 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.

   (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 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 interest 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 {{9-30-92 p.C-2578}}in relation to established collateral values;
   (v) provisions which specify the circumstances and condition by 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 approved in advance by a majority of the entire board of directors in accordance with Section 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(b);
   (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 in excess of $25,000 which are classified "Substandard" as of December 31, 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 the 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 develop or revise, adopt and implement 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 under- {{5-31-93 p.C-2579}}taken 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.

   [.9] 9. 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 to 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.

   [.10] 10. 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 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 the Superintendent as determined at subsequent examinations and/or visitations.

   [.11] 11. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of laws, rules, and/or regulations, to the extent legally possible, which are fully set out on pages 6-b, 6-b-1, 6-b-2, and 6-b-3 of the Report of Examination of the Bank as of December 31, 1991. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.12] 12. Within 90 days from the effective date of this ORDER, the Bank shall develop or revise, adopt, and implement a written liquidity and funds management policy. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.13] 13. Within 90 days from the effective date of this ORDER, the Bank shall 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. At a minimum, such policy shall address areas discussed on Pages 6-c, 6-c-1, and 6-c-2 of the Report of Examination as of December 31, 1991. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.14] 14. 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. 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 State Banking Department or FDIC examination of the Bank during that reporting period.

   [.15] 15. Within 90 days from the effective date of this ORDER, the Bank shall {{5-31-93 p.C-2580}}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 and any other affiliated company. Such policy shall limit the payment of any management, consulting, or other fees or funds of any nature, directly or indirectly, to only those fees or funds paid in connection with services performed on behalf of or for the benefit of the Bank.

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

   [.17] 17. During the life of this ORDER, the Bank shall furnish to the Regional Director a copy of any application to the Superintendent filed pursuant to Section 751.3 of the California Financial Code, Cal. Fin. Code § 751.3 (West 1989), to engage in real estate activities. This copy of such application shall be furnished to the Regional Director on or before the date of its filing with the Superintendent. In no event shall the Bank engage in real estate activities which are the subject of any such application filed pursuant to Section 751.3 of the California Financial Code without the prior written consent of the Regional Director.

   [.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.

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

   [.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 shareholders communication and also in conjunction with its notice of proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects.
   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 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.