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UNITED STATES OF AMERICA BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON,D.C. Written Agreement by and among CERRITOS VALLEY BANCORF’ htesia, California CERRITOS VALLEY BANK Artesia California 1 i 1 1 1 Docket NOS. 01-012-WAIRB-HC 01-012-WAIRB-SM 1 1 1 and FEDERALRESERVEBANK OF S A N FRANCISCO San Francisco, California 1 1 1 ) 1 1 WHEREAS, in recognition of their common goal to restore and maintainthe financial soundness of Cenitos Valley Bancorp, Artesia, California (“Bancorp”). a registd bank holding company, and its subsidiary bank, the Cenitos Valley Banlr, Artcsia, California(the “Bank“). a state chartered bank that is a member of the Federal Resewe System, Bancorp, the Bank,and the Federal Reserve Bank of San Francisco (the “Reserve Bank”)have mutually agreed to enter into this Written Agreement (the “Agreement”); and WHEREAS, on ddd6 C J / f ; 2001,the boards of directors of B a n q and the Bank, at duly constituted rneerhgs, adopted resolutions authorizing axtd directing f% - b & 0. e to enter into this Agreement on behalf of Bancorp and the Bank, respectively, and consenting to compliance with each and every applicable provision of this Agreement by Banwrp, the Bank and their institution-affiliated parties, as defined by sections 3(u) and 8@)(3) of the Federal Deposit InsuranmAct, as amended (the “FDI Act”) (12U.S.C. 1813(u) and 1818@)(3)). NOW,THEREFORE,Bancorp, the Bank, and the Reserve Bank agree as follows: Management 1. During the term of this Agreement, or as otherwise required by law, Bancorp and the Bank shall comply with the provisions of section 32 of the FDI Act (12 U.S.C. 1831i)and Subpart H of Regulation Y of the Board of Governors (12 C.F.R. Part 225, Subpart H), with respect to the appointment of any new directors or the hiring or promotion of any senior executive officers as defined in Regulation 0 of the Board of Governors (12 C.F.R. Part 215). AssetnIpbllity Management 2. (a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank acceptablewritten asseVliabilitymanagement policies designed to improve the management of the Bank’s liquidity and sensitivity to market risk and liquidity. (b) The policy regarding liquidity shall, at a minimum, address, consider, and include the following: (i) appropriate standards for volume, mix and matuity of the Bank‘s loans, investments, deposits, off-balance sheet connnitments, and alternative funding sources; 2 (ii) meaningful liquidity targets and parameters; (iii) appropriate oversight and review by management and the board of directors; and (iv) an appropriatecontingency funding plan. (c) The policy regarding sensitivityto market risk shall, at a minimum, address, consider, and include the following: (i) identification of individuals responsible for measuring,monitoring, and controllinginterest rate sensitiviw, (ii) appropriate oversight and review by management and the board of directors; (iii)maintenanceof documentation to support the validity and accuracy of assumptions used in measuring interest rate risk, (iv) parameters for controlling interest rate risk based on capital levels, earnings performance, and the risk tolerance of the Bank,and (v) action plans to reduce potential interest rate risk in the event that rate sensitivityresults fall outside approved limits. (d) The Bank‘s Asseaability Committee (the “ALCO”’) shall review, on a monthly basis, all asset/liability management decisionsmade by the Bank’s management, paying particular attention to whether each decision was made in accordance with approved policies. All exceptions to the policies shall be documented by the ALCO as to the reason for the exceptions and the continuance of the exceptions, taking into account the Bank‘s overall goals and Strategies. The ALCO shall maintain N1and complete minutes of its actions and shall provide monthly written reports to the board of directors to enable the board to make infomed decisions regarding the Bank‘s management of market risk and liquidity. Risk Management 3. Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank an acceptable written plan to establish and maintain effective risk management programs to address 3 board oversight, contml, and supervision of the Bank‘s senior management and the major o p t i o n s and activities of the Bank. The plan shall address and consider, at a minimum: (a) credit administrationpractices and policies including, without limitation, loan underwriting, documentation, and approval, monitoring of concentrations of credit, problem loan identification, compliance with laws and regulations and independent loan review;and (b) identification and monitoring of all risks affecting the Bank, including, without limitation,market risks, liquidity risks, legal risks, and reputational risks. Loan Administration 4. Within 60 days of this Agreement, the Bank shall review the adequacy of the loan administration function and shall submit to the Reserve Bank acceptable revised loan policies and procedures. The purposes of the review are: (a) to develop systems and procedures to correct loan administration deficiencies cited in the report of the examination as of September 30,2000 (the ‘Report of Examination”); (b) to develop systems and procedures to address credit qualityproblems identified with the FHA Title 1 loan portfolio; (c) to develop policy parameters addressingloan mix and concentrations; (d) to develop a loan documentation review system; and (e) to establish adequate internal controls over the Iendmg function. Asset Improvement Plan 5. (a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank an acceptable written plan designed to improve the Bank‘sposition through repapent, amortization,liquidation, additional collateral or other means, on each loan or other asset in excess of $100,000 that was past due as to principal or interest in excess of 90days as of the date 4 of this Agreement or that was adversely classified or listed as special mention in the Report of Examination. @) Within 30 days of the date that any additional loan or other asset in excess of $1OO,OOO becomes past due as to principal and interest for more than 90 days. is adversely classified internally by the Bank, or is adversely classified or listed for specialmention in any subsequent report of examination or visitation of the Bank, the Bank shall submit to the Reserve Bank an acceptablewritten plan to improve the Bank's position on such loan or other asset. (c) The plan for each loan or other asset shall be formally approved by the Bank's loan committee and shall, at a minimum, include: (i) A description of the current status of the loan or other asset, including book and nonbook carrying value, and the nature and value of supportingcollateral; (ii) proposed actions to improve, reduce, or eliminatethe loan or other asset, time fhnes for such actions, and the projected balance owing and value of anticipated collateral; and (iii) (d) the borrower's achowledgement of an response to the plan. Within 30 days of the end of each calendar quarter following this Agreement (September 30,December 31,March 31, and June 30), the Bank shall submit to the Reserve Bank a written progress report on the loans or other assets described within this paragraph, which shall include, at a minimum,the carrying value of the loan or other asset, changes in the nature and value of supporting collateral. and a copy of the Bank's current internal watch list. 5 Allowance for Loan and Lease Losses 6. The Bank shall maintain, through charges to current operating income, an adequate allowance for loan and lease losses (the “Allowance”). The adequacy of the Allowance shall be determined in light of the volume of criticized loans, the current level of past due and nonperforningloans, past loan loss experience, evaluation of the probable losses in the Bank’s portfolio, including the potential for the existence of unidentified losses in loans adversely classified and the imprecision of loss estimates, current economicconditions, the requirements of the InteragencyPolicy Statement on the Allowance for Loan and Lease Losses, dated December 22,1993, SFAS 114, SFAS 5, and examiners’ other criticismsas contained in the Report of Examination. The Bank shall develop a methodology for determining the adequacy of the Allowance, and shall maintain a written record of documentation to support the methodology. The methodology shall be submitted to the Reserve Bank within 60 days of this Agreement. Capital Adequacy 7. Within 60 days of this Agreement, Bancorp and the Bank shall submit to the Reserve Bank an acceptablejoint written plan to maintain sufficient capital at the Bank. The plan shall, at a minimum. address and consider: (i) the Bank‘s current and future capital requirements, including compliance with the Capital Adequacy Guidelines of the Board of Governors (12 C.F.R. Part 208, App. A and B); (ii) any planned growth in the Bank‘s assets; (iii) the Bank’s level of concentrations of credit; (iv) the volume of the Bank‘s adversely classified assets; (v) the volume of volatile funds placed with the Bank and the composition of the Bank’s funding, including any volatile funds that could require the maintenance of higher 6 capital levels; (vi) the Bank’s anticipated level of retained earnings; (vii) dividend payments; (viii) any unrealized depreciation in the Bank’s securities portfolio; and (ix) the source and timing of additional funds to llfill the future capital needs of the Bank. Dividends 8. Bancorp and the Bank shall not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors. Requests for approval shall be received by the Reserve Bank at least 30 days prior to the proposed dividend declaration date and shall contain, but not be limited to, information on the amount proposed to be paid, and Bank earnings and capital levels for the most recent annual period and the fiscal year to date. Debt Service 9. Bancorp shall not, directly or indirectly, incur any debt without the prior written approval of the Reserve Bank. All requests for prior written approval shall contain, but not be limitedto, a statement r e g a g the purpose of the debt, the terms of the debt, the planned sources for debt repayment, and an analysis of the cash flow resources available to meet such debt repayment. Strategic Plan and Budget 10. (a) Within 60days of this Agreement, the Bank shall submit to the Reserve Bank a written strategicplan and budget concerningthe Bank‘s proposed business activities for the remainder of 2001. This plan shall, at a minimum,provide for or describe: (i) the opmting assumptionsthat form the bases for major projected income and expense components, and the sources and uses of new fun&, (ii) financial perfomance objectives, including plans for asset growth, earnings, liquidity, and capital supported by detailed quarterly and annual pro forma financial statements, including projected budgets, balance sheets and income statements; (iii) the establishmentof a monthly review process to monitor the actual income and expenses of the Bank in comparison to budgetary projections; and (iv) steps to be taken to improve earnings. (b) A strategic plan and budget for each calendar year subsequent to 2001 shall be submitted to the Reserve Bank at least one month prior to the beginning of that calendar year. The board of directors shall each month review actual performance for that month in comparison to each month's budgetary projections and document analysis of significant variances. Regulatory Reports 11. The Bank shall take such actions as are necessary to ensure that all reports filed by the Bank, includingConsolidated Reports of Condition and Income, accurately reflect the Bank's condition on the dates for which such reports are filed, that all reports are filed in a timely manner, and that all records indicating how such reports are prepared are adequately maintained for supervisory review. 12. The Bank shall determine the value of its deferred tax Bccount and amend the fourth quarter 2000 and first quarter 2001 Reports of Condition and Income to accurately reflect the current condition. 8 13. Bancorp shall take such actions as are necessary to ensure that all FR-Y Reports accurately reflect Bancorp’s condition on the dates for which such reports are filed, that all such reports are filed in a timely manner, and that all records indicating how such reportsare prepared are adequatelymaintained for subsequent supervisory review. Internal Controls 14. Within 60days of this Agreement, the Bank shall submit to the Reserve Bank an acceptableWritten plan describing specific actions the board of directors will take to correct the internal control weaknesses and deficienciesnoted in the Report of Examination. Audit 15. (a) Within 60 days of this Agreement, the Bank shall review its present internal audit program to ensure that it is consistent with generally accepted auditing standards including, but not limited to, the scope and frequency of audits, follow-up procedures, and periodic scheduled reports to the board of directors. (b) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank an acceptable Written internal audit program designed to ensure that internal audits are conducted to verify implementationand compliance with policies, procedures, and controls established in connection with this Agreement. Approval of Plans and Policies 16. Bancorp and the Bank,as applicable, shall submit the plans, policies, programs, and procedures required by paragraphs 2,3,4,5,7,14, and IS hereof that are acceptableto the 9 Reserve Bank within the time periods set forth in this Agreement. Bancorp and the Bank, as applicable, shall adopt all approved plans. policies, programs, and procedures within 10 days of approval by the Reserve Bank and then shall fully comply with them. During the term of this Agreement, neither Bancorp nor the Bank shall amend or rescind any approved plans. policies, programs, or procedures without the prior written approval of the Reserve Bank. Progrws Reports 17. Within 30 days after the end of each calendar quarter followingthe date of this Agreement (September 30, December 31, March 31, and June 30), Bancorp and the Bank shall submit written progress reports to the Reserve Bank setting forth in detail the actions taken to comply with each provision of this Agreement and the results of those actions. The boards of directors of Bancorp and the Bank shall certify in writing to the Reserve Bank that each director has reviewed each quarterly progress report required by this paragraph. Such reports may be discontinued when the Reserve Bank, in writing, releases Bancorp and the Bank from making Mer reports. Communications 18. All communications regarding this Agreement shall be sent to: (a) Mr. Philip Ryan Director, Financial Examination Federal Reserve Bank of San Francisco 101 Market Street, MS 920 San Francisco, CA 94105 @) Mr. Hal Williams President, Cenitos Valle Bank 18300 Pioneer Blvd., 2" Floor Artesia,CA 90701 2 (c) Mr. Ronald W. Bachli President, Cenitos Valle Bancorp 18300 Pioneer Blvd., 2" floor Artesia, CA 90701 2 Effect and Other Terms of Agreement 19. Notwithstandingany provision of this Agreement to the contrary, the Reserve Bank may, in its sole discretion, grant written extensions of time to Bancorp and the Bank to comply with any provision of this Agreement. 20. The provisions of this Agreement shall be binding upon Bancorp, the Bank, and all of their institution-afiiliated parties, in their capacities as such, and their successors and assigns. 21. Each provision of this Agreement shall remain effective and enforceable until stayed, modified, terminated or suspendedby the Reserve Bank. 22. The provisions of this Agreement shall not bar, estop, or otherwise prevent the Board of Governors or any other federal or state agency or department h m taking any other action a e c t i n g Bancorp or the Bank or any of their current or former institution-afiiliated parties and their successors and assigns. 11 23. This Agreement is a "written agreement" for the purposts of, and is cnforcd~le by the Board of Governors as an Order issuedunder, section 8 ofthe FDI Act (12 U.S.C.1818). IN WlTNESS WHEREOF,the partits have caused this Agreement to be executed as of this&dayof o , & Cenitos Valley Bank ,2001.