Attached files
Exhibit 10.3
UNITED STATES OF AMERICA
Before the
OFFICE OF THRIFT SUPERVISION
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In the Matter of ) Order No.: WN-09-031
)
LOS PADRES BANK ) Effective Date: October 14, 2009
)
Solvang, California )
OTS Docket No. 07935 )
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ORDER TO CEASE AND DESIST
WHEREAS, Los Padres Bank, Solvang, California, OTS Docket No. 07935
(Association), by and through its Board of Directors (Board), has executed a
Stipulation and Consent to the Issuance of an Order to Cease and Desist
(Stipulation); and
WHEREAS, the Association, by executing the Stipulation, has consented and
agreed to the issuance of this Order to Cease and Desist (Order) by the Office
of Thrift Supervision (OTS) pursuant to 12 U.S.C. ss. 1818(b); and
WHEREAS, pursuant to delegated authority, the OTS Regional Director for the
Western Region (Regional Director) is authorized to issue Orders to Cease and
Desist where a savings association has consented to the issuance of an order.
NOW, THEREFORE, IT IS ORDERED that:
Cease and Desist.
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1. The Association and its directors, officers, and employees shall cease and
desist from any action (alone or with others) for or toward, causing, bringing
about, participating in, counseling, or aiding and abetting the unsafe or
unsound practices that resulted in deteriorating asset quality, deficient
earnings, and inadequate capital at the Association.
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Capital.
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2. By November 6, 2009, the Association shall have and maintain "adequately
capitalized" status as defined at 12 C.F.R. ss. 565.4(b)(2).
3. By December 31, 2009, the Association shall meet and maintain a Tier One Core
Capital Ratio of at least eight percent (8%) and a Total Risk-Based Capital
ratio of at least twelve percent (12%).
4. By October 30, 2009, the Association shall submit a written plan to address
how the Association will meet and maintain the capital ratios set forth in
Paragraph 3 of this Order (Capital Plan) to the Regional Director for review and
comment. The Capital Plan shall, at a minimum:
(a) take into consideration the requirements and restrictions imposed by
this Order;
(b) detail capital preservation and enhancement strategies with specific
narrative goals, which shall result in new equity and a capital infusion;
(c) consider and address the amount of additional capital that would be
necessary to meet the capital requirements of Paragraph 3 of this Order
under different forward-looking scenarios involving progressively stressed
economic environments;
(d) identify the specific sources of additional capital;
(e) detail timeframes by which the additional capital will be raised and
provide specific target month-end capital levels;
(f) provide for alternative sources to strengthen capital, should the
primary sources identified under Paragraph (d) of this section not be
available; and
(g) require Management to prepare and submit for Board review at each
regular monthly Board meeting a written report on the Association's
compliance with the Capital Plan and the Association's current capital
levels and ratios (Capital Status Report).
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5. Within fifteen (15) days of receipt of any comments from the Regional
Director, the Board shall make the changes, if any, to the Capital Plan required
by the Regional Director. Thereafter, the Board shall adopt and ensure that the
Association implements and complies with the Capital Plan. Within five (5) days
of the Board meeting at which it was adopted, the Association shall provide a
copy of the Capital Plan adopted by the Board to the Regional Director.
6. On the first (1st) and fifteenth (15th) of each month, beginning with the
month of December 2009, Senior Executive Officers(1) (Management) shall provide
the Regional Director and the Board with written updates on the status of the
steps taken by the Association to comply with the Capital Plan (Capital
Updates).
7. Within thirty (30) days after the end of the month, beginning with the month
of November 2009, Management shall also provide monthly variance reports to the
Regional Director and the Board that describe the Association's compliance with
the Capital Plan (Monthly Capital Plan Variance Reports). The Monthly Capital
Plan Variance Reports shall: (a) detail actual operating results versus
projected results; (b) include detailed explanations of any material deviations;
and (c) include a description of the specific corrective actions or measures
that have been implemented or are proposed to address each material deviation.
8. The Board's review of the Capital Updates, the Monthly Capital Plan Variance
Reports and its evaluation of Management and the Association's compliance with
the elements of the Capital Plan shall be thoroughly documented in the Board
meeting minutes. The Association shall submit the Board meeting minutes to the
Regional Director within five (5) days of the Board meeting.
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(1) The term Senior Executive Officer is defined at 12 C.F.R. ss. 563.555.
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9. By October 30, 2009, the Association shall prepare and submit for the
Regional Director's review and comment a written Contingency Plan. The
Contingency Plan shall detail the actions to be taken, with specific time
frames, to achieve one of the following results by the later of the date of
receipt of all required regulatory approvals or sixty (60) days after the
implementation of the Contingency Plan: (a) merger with, or acquisition by,
another federally insured depository institution or holding company thereof; or
(b) voluntary liquidation by filing an appropriate application with the OTS in
conformity with federal laws and regulations. The Board shall make any changes
to the Contingency Plan required by the Regional Director within twenty (20)
days after being notified of such changes and provide a copy of the revised
Contingency Plan to the Regional Director. The Association shall implement the
Contingency Plan at the direction of the Regional Director.
Allowance for Loan and Lease Losses.
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10. By November 30, 2009, the Association shall submit to the Regional Director
for review and comment a revised Allowance for Loan and Lease Loss Policy (ALLL
Policy) to ensure that the Association appropriately identifies and reports
ALLL. At a minimum, the ALLL Policy shall:
(a) conform to generally accepted accounting principles and applicable
regulatory requirements and guidance(2) and be appropriate for the size of
the Association and the complexity of its loan portfolio; and
(b) specifically incorporate an appropriate migration analysis to support
loss factors for all Pass, Watch, Special Mention and adversely classified
asset categories.
11. Within fifteen (15) days of receiving any comments from the Regional
Director, the Board shall make the changes, if any, to the ALLL Policy required
by the Regional Director. Thereafter, the Board shall adopt and ensure that the
Association implements and complies with the ALLL Policy. Within five (5) days
of the Board meeting at which it was adopted, the Association shall provide a
copy of the ALLL Policy adopted by the Board to the Regional Director.
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(2) See 12 C.F.R. ss. 560.160; Section 261 of OTS Examination Handbook (Adequacy
of Valuation Allowances); OTS CEO Letter No. 250: Interagency Policy Statement
on the Allowance for Loan and Lease Losses And Questions and Answers on
Accounting for Loan and Lease Losses (2006 ALLL Policy Statement); and OTS CEO
Letter No. 304: ALLL - Observed Thrift Practices Including Sound Practices; and
Statement of Financial Accounting Standards (SFAS) Nos. 5 and 114.
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Liquidity Policy.
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12. By November 30, 2009, the Association shall submit to the Regional Director
a comprehensive Liquidity Policy. The Liquidity Policy shall contain specific
Board strategies for ensuring that the Association maintains adequate short-term
and long-term liquidity to withstand any anticipated or extraordinary demand
against its funding base. At a minimum, the Liquidity Policy must include: (a) a
cash flow analysis that includes reasonable assumptions, identifies anticipated
funding needs and the sources of liquidity to meet those needs, considers the
level and maturity of brokered deposits, and addresses potential contingent
liabilities; and (b) identification of alternative funding sources to meet
extraordinary demands. Such alternative funding sources must consider, at a
minimum, the selling of assets, obtaining lines of credits from correspondent
institutions, recovering charged-off assets, and injecting additional equity
capital. Further, the Liquidity Policy shall require provision of liquidity
reports to the Board and the Regional Director in a frequency satisfactory to
the Regional Director.
13. Within fifteen (15) days of receipt of any comments from the Regional
Director, the Board shall make the changes, if any, to the Liquidity Policy
required by the Regional Director. Thereafter, the Board shall ensure that the
Association implements and complies with the Liquidity Plan. Within five (5)
days of the Board meeting at which it was adopted, the Association shall provide
a copy of the Liquidity Plan adopted by the Board to the Regional Director.
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14. Any request to modify the Liquidity Plan shall be submitted to the Regional
Director for review and written non-objection at least thirty (30) days prior to
the proposed date to implement any such modification.
Internal Asset Review Policy.
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15. By November 30, 2009, the Association shall submit to the Regional Director
for review and comment a revised comprehensive Internal Asset Review Policy (the
IAR Policy) that is commensurate with the Association's size, risk, and the
complexity of its lending and investment activities, that is consistent with the
requirements of OTS Chief Executive Officer Memorandum No. 140, 12 C.F.R. ss.
560.160 and OTS Examination Handbook Section 260 to ensure the timely
classifications of assets, and that is designed to focus on the Association's
commercial lending and commercial loan portfolio.
16. To ensure the independence of the IAR function, the IAR Policy shall require
loan underwriting, servicing, and purchasing functions to be segregated from the
credit review function, except for common oversight of all functions by members
of Management.
17. The IAR Policy shall, at a minimum, require Management to conduct quarterly
reviews of classified assets and to prepare quarterly reports to the Board, to
be submitted in writing within forty-five (45) days after the close of each
calendar quarter, beginning with the quarter ending on December 31, 2009,
regarding the status and resolution of each classified asset. The Board shall
conduct its review of the quarterly reports required by this Paragraph within
thirty (30) days of receipt of the quarterly reports from Management. The IAR
Policy shall require that the Board fully document its review of the IAR Policy
results in the appropriate Board meeting minutes.
18. Within fifteen (15) days of receiving any comments from the Regional
Director, the Board shall make the changes, if any, to the IAR Policy required
by the Regional Director. Thereafter, the Board shall adopt and ensure that the
Association implements and complies with the IAR Policy. Within five (5) days of
the Board meeting at which it was adopted, the Association shall provide a copy
of the IAR Policy adopted by the Board to the Regional Director.
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Classified Asset Reduction Plan.
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19. By November 30, 2009, the Association shall submit to the Regional Director
a written comprehensive Classified Asset Reduction Plan that will return asset
quality to a level acceptable to the Regional Director and within a time frame
satisfactory to the Regional Director. At a minimum, the Classified Asset
Reduction Plan shall include:
(a) targets for the levels of classified assets as a percentage of Tier One
Core Capital and ALLL and time frames for each such target;
(b) a description of the manner and methods for reducing the Association's
level of classified assets to the targets set therein; and
(c) all relevant assumptions and projections and documentation supporting
such assumptions and projections.
20. Within fifteen (15) days of receipt of any comments from the Regional
Director, the Board shall make the changes, if any, to the Classified Asset
Reduction Plan required by the Regional Director. Thereafter, the Board shall
adopt and ensure that the Association implements and complies with the
Classified Asset Reduction Plan. Within five (5) days of the Board meeting at
which it was adopted, the Association shall provide a copy of the Classified
Asset Reduction Plan adopted by the Board to the Regional Director.
21. Any request to modify the Classified Asset Reduction Plan shall be submitted
to the Regional Director for review and written non-objection at least thirty
(30) days prior to the proposed date to implement any such modification.
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22. Within forty-five (45) days after the close of each calendar quarter,
beginning with the quarter ending December 31, 2009, the Board shall review
quarterly variance reports prepared by Management on the Association's
compliance with the Classified Asset Reduction Plan (Quarterly Classified Asset
Reduction Plan Variance Reports). The Quarterly Classified Asset Reduction Plan
Variance Reports shall include actual operating results versus projected
results, detailed explanations of any material deviations from the Classified
Asset Reduction Plan, and a specific description of the corrective actions or
measures that have been implemented, proposed or are under consideration to
correct any material deviation.
23. The Board shall provide the Regional Director with a copy of Management's
Quarterly Classified Asset Reduction Plan Variance Reports and the Board meeting
minutes detailing the Board's review of the Quarterly Classified Asset Reduction
Plan Variance Reports, including the identification of any corrective actions
adopted by the Board, and the Board's evaluation and assessment of Management
and the Association's compliance with the Classified Asset Reduction Plan within
ten (10) days after the date of the Board meeting at which the Board's review
was conducted.
Concentrations Risk Management Policy.
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24. By November 30, 2009, the Board shall adopt a Concentrations Risk Management
Policy that provides for the assessment, monitoring, and control of the
potential concentrations risks for all assets other than conforming Single
Family Residential (SFR) loans and for all funding sources, including, but not
limited to, brokered deposits, uninsured deposits, Federal Home Loan Bank
advances, and other borrowings. The Concentrations Risk Management Policy, at a
minimum, shall address:
(a) the identification and quantification of the nature and level of risk
presented by the concentrations;
(b) specific policy limits by loan category, as a percentage of Tier 1 Core
Capital plus ALLL to reflect the level of risk acceptable to the Board
based on the Association's market position, historical experience, trade
area, probable future loan and funding trends, staff capabilities, and
technological resources;
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(c) the applicable guidelines OTS CEO Letter No. 245, entitled "Updated
Director's Responsibility Guide and Guide to Management Reports";
(d) the establishment of a portfolio management process to evaluate the
overall exposure to economic risk factors and to develop strategic plans to
mitigate concentration risk in the event of adverse market conditions;
(e) appropriate management information systems and data collection to
generate Board and Management oversight reports;
(f) the requirement of stress tests or sensitivity analyses of the
identified concentrations and portfolio segments with common risk
characteristics, over specific time periods, to quantify the impact of
changing economic scenarios on asset quality, earnings, and capital
conditions, including, but not limited to, those affecting certain relevant
industries or sectors on asset quality, earnings, and capital;
(g) the development of a management information system that stratifies the
Association's concentrations by key factors used in delineating risks and
establishment of internal controls to monitor compliance with the
concentration limits;
(h) the Board's periodic review and approval of limits on the
concentrations;
(i) internal controls and internal audit processes sufficient to assess the
adequacy of the Association's concentration risk management; and
(j) a specific plan, with identified timeframes, to reduce the
Association's existing exposure to commercial real estate loans.
25. Upon the adoption of the Concentrations Risk Management Policy by the Board,
the Board shall ensure that Association implements and complies with the
Concentrations Risk Management Policy. Within five (5) days from the meeting at
which it was adopted, the Board shall provide the Regional Director with a copy
of the Concentrations Risk Management Policy adopted by the Board and a
certified copy of the Board meeting minutes reflecting the Board's discussion
and action.
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Loan Underwriting.
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26. By November 30, 2009, the Association shall submit to the Regional Director
for review and comment an enhanced loan modification policy to ensure that loan
modifications are done prudently and in a safe and sound manner (Loan
Modification Policy). The Loan Modification Policy shall provide, at a minimum,
that the:
(a) loan files adequately document the analysis of the current financial
position of borrowers and guarantors, if any, and the ability to repay the
modified loan;
(b) loan files contain appraisals/evaluations that meet regulatory
guidelines, including 12 C.F.R. Part 564 and OTS Examination Handbook
Section 208, and are performed by qualified appraisers/evaluators that have
been approved by the Association; and
(c) transactions are reviewed by independent, qualified personnel to
determine that the modifications are appropriately classified and accounted
for in accordance with Generally Accepted Accounting Principles.
27. Within fifteen (15) days of receiving any comments from the Regional
Director, the Board shall make the changes, if any, to the Loan Modification
Policy required by the Regional Director. Thereafter, the Board shall adopt and
ensure that the Association implements and complies with the final Loan
Modification Policy. Within five (5) days of the Board meeting at which it was
adopted, the Association shall provide a copy of the Loan Modification Policy
adopted by the Board to the Regional Director.
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Investment Securities and Derivative Instrument Restrictions.
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28. Effective immediately, the Association shall not purchase securities or
derivative instruments, other than agency-backed securities or securities backed
with the full faith and credit of the United States government, without the
prior written non-objection of the Regional Director. The Association's written
request for written non-objection should be submitted to the Regional Director
at least thirty (30) days prior to the proposed purchase of such securities or
instruments together with the complete pre-acquisition analysis conducted by the
Association.
Schedule CMR Reporting.
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29. Effective immediately, the Association shall have and maintain sufficient
documentation to support the valuation of self-valued securities as reported in
the Thrift Financial Report (TFR) - Schedule CMR. Such documentation shall
include, at a minimum, information supporting price discovery for such
valuations from independent third-party pricing services or fully documented and
supported results of the Association's internal valuation model.
Severance Payments.
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30. Effective immediately, the Association shall not make any golden parachute
payment(3) or prohibited indemnification payment(4) unless, with respect to each
such payment, the Association has complied with the requirements of 12 C.F.R.
Part 359.
Directorate and Management Changes.
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31. Effective immediately, the Association shall comply with the prior
notification requirements for changes in directors and Senior Executive Officers
set forth in 12 C.F.R. Part 563, Subpart H.
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(3) The term "golden parachute payment" is defined at 12 C.F.R. ss 359.1(f).
(4) The term "prohibited indemnification payment" is defined at 12 C.F.R.
ss 359.1(l).
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Compensation.
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32. Effective immediately, the Association shall not enter into, renew, extend,
or revise any contractual arrangement relating to compensation or benefits for
any Senior Executive Officer or Director of the Association, unless it first
provides the Regional Director with not less than thirty (30) days prior written
notice of the proposed transaction. The notice to the Regional Director shall
include a copy of the proposed employment contract or compensation arrangement,
or a detailed written description of the compensation arrangement to be offered
such Officer or Director, including all benefits and perquisites. The Board
shall ensure that any contract, agreement, or arrangement submitted to the
Regional Director fully complies with the requirements of 12 C.F.R. Part 359.
Third-Party Contracts.
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33. Effective immediately, the Association shall not enter into any arrangement
or contract with a third party that is significant to the overall operation or
financial condition of the Association or outside the Association's normal
course of business unless, with respect to each such contract, Association has:
(a) provided Regional Director with a minimum of thirty (30) days prior written
notice of such arrangement or contract; (b) determined that the arrangement or
contract complies with the standards and guidelines set forth in Thrift Bulletin
82a (TB 82a); and (c) received written notice of non-objection from the Regional
Director.
Transactions with Affiliates.
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34. Effective immediately, the Association shall not engage in any transaction
with an affiliate unless, with respect to each such transaction, the Association
has complied with the notice requirements set forth in 12 C.F.R. ss.
563.41(c)(4), which shall include the information set forth in 12 C.F.R. ss.
563.41(c)(3). The Board shall ensure that any transaction with an affiliate for
which notice is submitted pursuant to this Paragraph, complies with the
requirements of 12 C.F.R. ss. 563.41 and Regulation W, 12 C.F.R. Part 223.
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Brokered Deposits Restriction.
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35. Effective immediately, the Association shall comply with the requirements of
12 C.F.R. ss. 337.6(b) and shall not: (a) accept, renew or roll over any
brokered deposit, as that term is defined at 12 C.F.R. ss. 337.6(a)(2); or (b)
act as a deposit broker, as that term is defined at 12 C.F.R. ss. 337.6(a)(5).
Growth Restriction.
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36. Effective immediately, the Association shall not increase its total assets
during any quarter in excess of an amount equal to net interest credited on
deposit liabilities during the prior quarter without the prior written notice of
non-objection of the Regional Director.
Dividend Restriction.
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37. Effective immediately, the Association shall pay no dividends or make any
other capital distributions, as that term is defined in 12 C.F.R. ss. 563.141,
without receiving the prior written non-objection of the Regional Director. The
Association's written request for written non-objection should be submitted to
the Regional Director at least thirty (30) days prior to the anticipated date of
the proposed dividend payment or distribution of capital.
Effective Date, Incorporation of Stipulation.
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38. This Order is effective on the Effective Date as shown on the first page.
The Stipulation is made a part hereof and is incorporated herein by this
reference.
Duration.
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39. This Order shall remain in effect until terminated, modified, or suspended
by written notice of such action by the OTS, acting by and through its
authorized representatives.
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Time Calculations.
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40. Calculation of time limitations for compliance with the terms of this Order
run from the Effective Date and shall be based on calendar days, unless
otherwise noted.
41. The Regional Director, or an OTS authorized representative, may extend any
of the deadlines set forth in the provisions of this Order upon written request
by the Association that includes reasons in support for any such extension. Any
OTS extension shall be made in writing. Submissions and Notices.
42. All submissions, including any reports, to the OTS that are required by or
contemplated by this Order shall be submitted within the specified timeframes.
43. Except as otherwise provided herein, all submissions, requests,
communications, consents or other documents relating to this Order shall be in
writing and sent by first-class U.S. mail (or by reputable overnight carrier,
electronic facsimile transmission or hand delivery by messenger) addressed as
follows:
(a) To the OTS:
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C.K. Lee, Regional Director
Office of Thrift Supervision, Western Region
225 E. John Carpenter Freeway, Suite 500
Irving, TX 75062-2326
With a copy to:
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Tony Jardieu, Assistant Director
Office of Thrift Supervision, Western Region
225 E. John Carpenter Freeway, Suite 500
Irving, TX 75062-2326
(b) To the Association:
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Craig J. Cerny, Chairman
Los Padres Bank
610 Alamo Pintado Road
Solvang, CA 93463
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No Violations Authorized.
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44. Nothing in this Order or the Stipulation shall be construed as allowing the
Association, its Board, officers, or employees to violate any law, rule, or
regulation.
IT IS SO ORDERED.
OFFICE OF THRIFT SUPERVISION
By: /s/
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C.K. Lee
Regional Director, Western Region
Date: See Effective Date on page 1
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