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FDIC Enforcement Decisions and Orders

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   [11,709] In the Matter of Charter Pacific Bank, Agoura Hills, California, Docket No. 00-034b (5-10-00)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 12-10-01; see ¶16,294.)

   [.1] Management—Qualifications Specified

   [.2] Capital—Increase Required

   [.3] Loan Loss Reserve—Establishment of or Increase Required

   [.4] Bank Operations—BankCard Division—Merchant Accounts—Minimum Requirements

   [.5] Bank Operations—BankCard Division—Internal Routine and Control Procedures, Policy Required

   [.6] Bank Operations—BankCard Division—Divestiture Required

   [.7] Bank Operations—New Types of Lending Restricted

   [.8] Strategic Plan—Preparation of Required

   [.9] Dividends—Dividends Restricted

   [.10] Compliance Program—Minimum Requirements

   [.11] Violations of Law—Correction of Violations Required

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

In the Matter of
CHARTER PACIFIC BANK
AGOURA HILLS, CALIFORNIA
(Insured State Nonmember Bank)

ORDER TO
CEASE AND DESIST

FDIC-00-034b

   Charter Pacific Bank, Agoura Hills, 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 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 May 4, 2000, 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 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 and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   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 laws and/or regulations listed below. Each of the items listed below refers specifically to practices and violations described in the FDIC Division of Supervision Report of Examination dated October 18, 1999 ("Report of Examination") and/or the FDIC Division of Compliance and Consumer Affairs Compliance Report dated September 20, 1999 ("Compliance Report"):

   (a) operating with inadequate management;

   (b) operating with inadequate equity capital and an inadequate allowance for losses in relation to the Bank's contingent liabilities, potential losses, and overall risk exposure generated by the Bank's BankCard Division ("BankCard Division");
{{2-28-02 p.C-4930}}

   (c) following improper practices governing the operation of the BankCard Division and operating with inadequate internal routines and control policies governing the operation of the BankCard Division;

   (d) operating with policies and internal routines and controls which are insufficient to ensure compliance with laws and regulations referred to in the Compliance Report;

   (e) operating with officers and employees who do not have knowledge of applicable regulatory requirements sufficient to ensure compliance with laws and regulations referred to in the Compliance Report;

   (f) operating with a Board of Directors which has provided inadequate supervision over, and direction to, the management of the Bank in order to ensure compliance with laws and regulations referred to in the Compliance Report; and

   (g) operating in violation of the following laws and/or regulations:

       (i) Section 607(a) of the Fair Credit Reporting Act, 15 U.S.C. §   1681(e)(a), as more fully described on Page 7 of the Compliance Report;

       (ii) Part 226, Regulation Z of the Board of Governors of the Federal Reserve System as more fully described on Pages 8-10 of the Compliance Report;

       (iii) Part 203, Regulation C of the Board of Governors of the Federal Reserve System as more fully described on Pages 10-11 of the Compliance Report;

       (iv) Part 202, Regulation B of the Board of Governors of the Federal Reserve System as more fully described on Pages 11-13 of the Compliance Report;

       (v) Part 3500, Regulation X of the Department of Housing and Urban Development as more fully described on Page 13 of the Compliance Report;

       (vi) Part 229, Regulation CC of the Board of Governors of the Federal Reserve System as more fully described on Pages 13-16 of the Compliance Report;

       (vii) Part 230, Regulation DD of the Board of Governors of the Federal Reserve System as more fully described on Page 16 of the Compliance Report;

       (viii) Part 205, Regulation E of the Board of Governors of the Federal Reserve System as more fully described on Page 17 of the Compliance Report; and

       (ix) Part 329 of the FDIC's Rules and Regulations as more fully described on Page 18 of the Compliance Report.

   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 the following:

       (i) a chief executive officer with proven ability in managing a Bank of comparable size, reducing risk exposures, improving earnings, and other matters needing particular attention;

       (ii) a chief financial officer with appropriate experience in investments and liquidity and funds management;

       (iii) a senior lending officer with significant appropriate lending, collection, and loan supervision experience;

       (iv) a senior officer who shall be assigned the responsibility of supervising the operations of the BankCard Division, including administration and the identification and control of risk; and

       (v) a compliance officer who shall be given written authority by the Bank's Board of Directors to implement and supervise the Bank's program for compliance with all applicable consumer laws and regulations. Such person shall report directly to the Board of Directors and shall be provided with adequate resources to implement the Bank's compliance program as well as training in all applicable consumer laws and regulations, with said training reported to, and recorded in the minutes of, the Board of Directors each calendar quarter.

   (b) Each member of management shall be provided appropriate written authority from the Bank's Board of Directors to implement the provisions of this ORDER.

   (c) 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

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       (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, risk exposure, earnings, management effectiveness, and liquidity.

   (d) During the life of this ORDER, the Bank shall notify Regional Director George J. Masa of the FDIC's San Francisco Regional Office (Division of Supervision) and Regional Director James D. Densmore of the FDIC's San Francisco Regional Office (Division of Compliance and Consumer Affairs) ("FDIC Regional Directors") 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.

   (e) The Bank may not add any individual to its Board of Directors or employ any individual as a senior executive officer if either of the FDIC Regional Directors issues a notice of disapproval pursuant to Section 32 of the Act, 12 U.S.C. §   1831i.

[.2] 2. (a) During the life of this ORDER, the Bank shall have Tier 1 capital in such an amount as to equal or exceed ten (10.0) percent of the Bank's total assets.

   (b) During the life of this ORDER, the Bank shall maintain Tier 1 risk-based capital and total risk-based capital to meet the definition of "well-capitalized" as set forth in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325.

   (c) The level of capital to be maintained during the life of this ORDER pursuant to Subparagraphs 2(a) and 2(b) shall be in addition to a fully funded allowance for loan and lease losses and a fully funded allowance for BankCard Division losses, the adequacy of which shall be satisfactory to the FDIC Regional Directors 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 FDIC Regional Directors; or

       (v) any combination of the above means.

Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 2 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 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, 550 - 17th Street, N.W., 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 FDIC Regional Directors 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
{{7-31-00 p.C-4932}} 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 capital-related terms used in Paragraph 2 of this ORDER 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).

[.3] 3. Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for losses attributed to the BankCard Division.

   Additionally, within 30 days from the effective date of this ORDER, the Board of Directors shall maintain a comprehensive policy for determining the adequacy of the reserve for losses generated by the BankCard Division. For the purpose of this determination, the adequacy of the reserve shall be determined after the application of all chargeback items. The policy shall provide for a review of the allowance at least monthly and should also 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 allocations for the potential losses generated by the BankCard Division may be properly reported in the quarterly Reports of Condition and Income. The review should focus on the results of the BankCard Division's internal analysis of individual merchant accounts, its experience regarding losses and chargebacks generated by those merchants, and the overall volume of chargebacks within the BankCard Division. The results of the review shall be analyzed by both the Director's Underwriting Committee and the Board of Directors. A deficiency in the allowance 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 Director's Underwriting Committee meeting and 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 allowance for losses consistent with the written policy governing the BankCard Division. Such policy and its implementation shall be satisfactory to the FDIC Regional Directors as determined at subsequent examinations and/or visitations.

[.4] 4. Immediately upon the effective date of this ORDER, the Bank shall take the following actions, at a minimum, with regard to the BankCard Division's merchant card processing functions:

       (a) cease the practice of selling credit card information for any purpose whatsoever;

       (b) reduce the risk profile of the BankCard Division's merchant portfolio by immediately terminating the account of any merchant considered to be of high risk as defined and/or interpreted by Visa and MasterCard, and also by immediately terminating any merchant account which exceeds Visa and MasterCard chargeback thresholds;

       (c) require that any merchant account applicant be denied such an account if the applicant has had a previous merchant account which was terminated by the Bank;

       (d) require that any merchant account applicant determined by the Bank to be unqualified shall not subsequently be replaced by an affiliated merchant;

       (e) enforce the BankCard Division's written policy requirements that financial statements submitted by merchants contain complete information, are executed by all pertinent parties, and are analyzed thoroughly by BankCard Division personnel;

       (f) revise the BankCard Division's written policies and procedures, as necessary, to address all recommendations set forth in the Report of Examination; and

       (g) revise the BankCard Division's written policies and procedures, as necessary, to require that proper routines and controls are in place for the ACH Debit Origination Program.

   To the extent that the written policy governing the operation of the BankCard Division is revised pursuant to this Paragraph, such policy and its implementation shall be in a form and manner acceptable to the FDIC Regional Directors as determined at subsequent examinations and/or visitations.

[.5] 5. (a) Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a policy for the operation of the Bank and the BankCard Division in such a manner as to provide adequate internal routine and control policies consis-
{{7-31-00 p.C-4933}} tent with safe and sound banking practices. Such policy shall, at a minimum, eliminate and/or correct all internal routine and control deficiencies as more fully set forth on Pages 10-11 of the Report of Examination and shall guarantee that the Bank and the BankCard Division will take all necessary steps to ensure future compliance with all applicable laws and regulations. Such policy and its implementation shall be satisfactory to the FDIC Regional Directors as determined at subsequent examinations and/or visitations.

[.6] 6. Within 5 months from the effective date of this ORDER or no later than September 30, 2000, whichever comes first, the Bank shall sell or otherwise divest itself of the BankCard Division. In addition, within 30 days of the issuance of this ORDER, and at the end of each 30 day period thereafter, the Bank shall furnish a written status report to the FDIC Regional Directors detailing the form and manner of its efforts in this regard. Each status report shall be recorded in the minutes of the Board of Directors of the Bank. The status report may be discontinued when the FDIC Regional Directors have determined that the report is no longer necessary and have released the Bank in writing from making a further report.

[.7] 7. Upon the effective date of this ORDER, the Bank shall not engage in any new types of lending unless:

       (a) the Bank's management, including its Director's Underwriting Committee, has prepared a written analysis of the new type of lending to include an assessment of risk, infrastructure needs, marketing plans, and market potential.

       (b) the Board of Directors has previously adopted and implemented relevant written lending and collection policies which provide effective guidance and control over the Bank's new lending function. Such policies and their implementation shall be in a form and manner acceptable to the FDIC Regional Directors as determined at subsequent examinations and/or visitations.

[.8] 8. Within 30 days from the effective date of this ORDER, the Bank shall formulate, adopt, and submit to the FDIC Regional Directors the following:

       (a) a written, viable three-year strategic plan. Such plan shall establish goals and objectives, strategies, priorities, and time frames. The plan should specifically address growth, profitability, lending areas and types, off-balance sheet activities, staffing, and infrastructure needs for all banking operations of the Bank with the exception of the BankCard Division. The strategic plan shall be consistent with capital requirements delineated under Paragraph 2 of this ORDER.

       (b) a written, three-year operating budget consistent with safe and sound banking practices as well as the strategic plan required in Paragraph 10(a) above. Such budget shall include specific goals for the dollar volume of individual asset and liability categories, income and expense components, capital components, and off-balance sheet items. The budget shall include adequate support of the assumptions that form the basis for the described major categories.

   The strategic plan and budget, their implementation and achievement, shall be in a form and manner acceptable to the FDIC Regional Directors as determined at subsequent examinations and/or visitations.

[.9] 9. The Bank shall not pay cash dividends without the prior written consent of the FDIC Regional Directors.

[.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall revise its written compliance program. The revised compliance program shall be adopted by the Board of Directors and shall set forth revised policies and procedures designed to meet the Bank's compliance responsibilities on an ongoing basis. The Board of Directors shall assure implementation of, and adherence to, the revised compliance program. At a minimum, the revised compliance program shall specifically address the following areas:

       (a) the appointment of a compliance officer, including a delineation of the officer's duties and responsibilities as referenced in Paragraph 1(a)(v) of this ORDER;

       (b) the education and training in applicable consumer laws and regulations of all Bank personnel involved in lending or whose responsibilities require knowledge of, and compliance with, applicable consumer laws and regulations; and

       (c) the establishment of an audit program which shall include policies and proce-

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    dures for internally monitoring the Bank's compliance with applicable consumer laws and regulations, including a quarterly review of the Bank's compliance program by the compliance officer, the results of which shall be in writing, reported to the Bank's Board of Directors, and recorded in the minutes of the Board meeting at which the report is made.

[.11] 11. Within 60 days from the effective date of this ORDER, the Bank shall:

       (a) eliminate and/or correct all violation of laws which are more fully described in the Compliance Report on Pages 7-18;

       (b) complete the restitution process as required by the Truth in Lending Act regarding reimbursement, and as more fully described in the Compliance Report on Pages 8-10.

   In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

[.12] 12. 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, 550 - 17th Street, N.W., 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.

   13. Within 30 days of the end of the first quarter following the effective date of this ORDER, and within 30 days of the end of each quarter thereafter, the Bank shall furnish written progress reports to the FDIC Regional Directors detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the FDIC Regional Directors 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 10th day of May, 2000.

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