Federal Deposit
Insurance Corporation

{{11-30-96 p.C-2788}}
   [¶10,656] In the Matter of Bank of Southern California, San Diego, California, Docket No. FDIC-92-305b (10-23-92).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate capital; operating with an excessive level of poor quality loans; operating without adequate reserve for loan losses; following hazardous lending practices; and operating in such a manner as to produce low earnings. (This order was terminated pursuant to an order of the FDIC dated 9-19-96. See ¶16,118.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Loan Policy—Written—Implementation
   [.6] Loan Loss Reserve—Establish/Maintain
   [.7] Bank Operations—Overhead Expenses—Control
   [.8] Strategic Plan—Preparation Required
   [.9] Assets—Total Assets—Limitations on Increase
   [.10] Dividends—Restricted
   [.11] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

BANK OF SOUTHERN CALIFORNIA
SAN DIEGO, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-305b
   Bank of Southern California, 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 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 October 2, 1992, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, 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 is had reason to believe that the Bank had engaged in unsafe or unsound banking practices. 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 equity capital in relation to the volume and quality of assets held by the Bank;
   (b) operating with a large volume of poor quality loans;
   (c) operating with an inadequate loan valuation reserve;
   (d) following hazardous lending practices; and
   (e) operating in such a manner as to produce low earnings.
   IT IS FURTHER ORDERED that the Bank 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 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, im- {{12-31-92 p.C-2789}}proving 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.

[.2] 2. (a) Within 180 days from the effective date of this ORDER, the Bank shall increase Tier 1 capital by $3,500,000 or such greater amount as is necessary to equal or exceed six and one-half (6.5) 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 six and one-half (6.5) percent of the Bank's total assets.
   (b) 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.
   (c) 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.

[.3] 3. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of April 6, 1992, 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) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of April 6, 1992 that have not previously been charged off to not more than $19,000,000.
   (c) Within 270 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of April 6, 1992 that have not previously been charged off to not more than $17,000,000.
   (d) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of April 6, 1992 that have not previously been charged off to not more than $15,000,000.
   (e) The requirements of subparagraphs 3(a), 3(b), 3(c), and 3(d) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Bank shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Bank to borrowers with classified loans or their related interests is not considered collection for the purpose of this paragraph. As used in subparagraphs 3(b), 3(c), 3(d), and 3(e) the word "reduce" means:

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

[.5] 5. (a) Within 60 days from the effective date of this ORDER, the Bank shall take steps to ensure adherence to its written lending policies in order to provide effective guidance and control over the Bank's lending function. Such adherence efforts shall include action to ensure compliance with specific guidelines for placing loans on a non-accrual basis consistent with FDIC instructions for the preparation of the Reports of Condition and Income. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. Implementation of the loan policy 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 Bank's loan practices, required by this paragraph, at a minimum, shall:

   (i) be 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) prohibit the capitalization of interest or loan related expense unless the board of directors or the directors' loan committee supports in writing and records in the minutes of the corresponding board of directors meeting or the committee meeting why an exception thereto is in the best interests of the Bank;
   (iii) 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) incorporate limitations on the amount that can be loaned in relation to established collateral values;
   (v) specify the circumstances and conditions under which real estate appraisals must be conducted by an independent third party;
   (vi) establish standards for unsecured credit;
   (vii) the board of directors shall adopt procedures whereby officer compliance with the 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.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Bank shall develop and adopt a plan which addresses overhead and other expenses and restores 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.

   [.8] 8. Within 60 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.

   [.9] 9. During the life of this ORDER, the Bank shall provide, at a minimum, 30 days prior written notice to the Regional Director and the Superintendent when it plans to increase its assets by seven and one-half (7.5) percent or more during any three month period.

   [.10] 10. 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 Tier 1 capital to total assets of the Bank will be not less than six and one-half (6.5) 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.