1
EXHIBIT 10.4
AMENDMENT TO THE AGREEMENT
BY AND BETWEEN
MERCANTILE NATIONAL BANK
LOS ANGELES, CALIFORNIA
AND
THE OFFICE OF THE COMPTROLLER OF THE CURRENCY
On February 22, 1991, the Mercantile National Bank, Los Angeles,
California ("Bank"), by and through its duly elected and acting Board of
Directors and the Comptroller of the Currency of the United States of America
("Comptroller"), by and through his duly authorized representative, entered
into an Agreement ("1991 Agreement").
In the Report of Examination dated March 6, 1995, the Comptroller,
through his appointed National Bank Examiner, has criticized certain practices
of the Bank and has cited certain violations of law, rule or regulation
applicable to the bank.
The Comptroller is of the opinion that an amendment to the 1991
Agreement is now warranted.
The Bank, through its duly elected and acting Board of Directors
("Board") and the Comptroller, through his duly authorized representative, have
mutually agreed that the Bank shall operate at all times in compliance with the
articles of this Amended Agreement ("Agreement"), which shall supersede and
replace in its entirety the 1991 Agreement.
2
ARTICLE I
(1) This Agreement shall be construed to be a "written agreement
entered into with the agency" within the meaning of 12 U.S.C. Section
1818(b)(1).
(2) This Agreement shall be construed to be a "written agreement
between such depository institution and such agency" within the meaning of 12
U.S.C. Section 1818(e)(1) and 12 U.S.C. Section 1818(i)(2).
ARTICLE II
PROGRESS REPORT
(1) On January 31, 1996 and monthly thereafter, the Board shall submit
a written progress report to the Director for Special Supervision, as well as
to the National Bank Examiners, Los Angeles Duty Station, 550 North Brand
Boulevard, Suite 500, Glendale, California, 91203-1900 setting forth in detail:
(a) actions taken to comply with each Article of this
Agreement; and
(b) the results of those actions.
ARTICLE III
NEW CHIEF FINANCIAL OFFICER
(1) Within sixty (60) days, the Board shall appoint a new, capable
chief financial officer.
(2) Prior to the appointment of any individual as chief financial
officer, the Board
- 2 -
3
shall submit to the Director for Special Supervision the following information:
(a) written notice as required by 12 C.F.R. Section 5.51,
together with a legible fingerprint card and IRS Tax Check
Waiver (Form 8821) for the proposed individual;
(b) a written statement of the Board's reasons for selecting
the proposed officer; and
(c) a written description of the proposed officer's duties and
responsibilities.
(3) The Director for Special Supervision shall have the power of veto
over the employment of the proposed chief financial officer. However, the
failure to exercise such veto power shall not constitute an approval or
endorsement of the proposed officer.
(4) In accordance with the position set forth in the Issues section of
the OCC's Temporary Rule Implementing Section 914 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, Federal Register
Vol. 55, No. 43, pp. 7692-94, March 5, 1990, the requirement to submit
information and the prior veto provisions of the Article are based on the
authority of 12 U.S.C. Section 1818(b) and do not require the OCC to complete
its review and act on any such information or authority within thirty (30) days.
ARTICLE IV
BOARD AND MANAGEMENT FEES
(1) Prior to the payment of any salary, consulting fee, expense
reimbursement or other type of compensation to a principal shareholder,
director or related interest of such as defined in 12 C.F.R. Section 215.2
("Individual"), the Board shall, at a minimum and in writing,
- 3 -
4
determine that such remuneration:
(a) is reasonable;
(b) has a direct relationship to, and is based solely upon, the
fair value of goods and services received by the bank;
(c) compensates the Individual only for providing goods and
services which meet the legitimate needs of the bank; and
(d) is in compliance with the requirements of Banking Circular
No. 115 dated August 30, 1978 and Supplement No. 1 therto
dated December 28, 1978.
Such determination shall be submitted to the Director for Special Supervision
who shall have the power of veto over any such proposed remuneration within
fifteen (15) days of receipt.
(2) In addition to the requirements of paragraph (1) of this Article,
the Board shall review and maintain:
(a) written documentation of all services rendered by the
Individual;
(b) records indicating the day(s) and time periods during which
the Individual's services were performed;
(c) expense vouchers and receipts for all reimbursable
expenses; and
(d) an analysis of the services rendered by the Individual to
ensure that the Bank has received the full benefit to which
it is entitled.
(3) The Board of Directors shall not receive any fees for the
fulfillment of their director responsibilities until such time as the bank has
regained profitability and is deemed to be in satisfactory condition by the
Comptroller.
- 4 -
5
ARTICLE V
CONSULTING CONTRACTS
(1) Within thirty (30) days, the Board, or the delegated committee
thereof, shall review existing consulting contracts and determine whether the
Bank requires such services. In making the determination, the following factors
at a minimum, shall be considered:
(a) the benefits derived from the consulting services;
(b) the cost effectiveness of employing the consulting
services; and
(c) delegating the consultant's responsibilities to a permanent
Bank employee.
For purposes of this Article, consulting services shall not include the annual
audit and tax work performed by the bank's independent audit firm nor the
services of the bank's outside legal counsel.
(2) The Board or delegated committee shall set forth its final
determination, that either justifies maintaining existing consulting services
or recommends terminating such services, and the supporting reasons, in a
written report to be approved by the entire Board. After it is approved, the
written report shall be forwarded to the Director for Special Supervision.
(3) If the Board determines that the Bank requires a consultant's
services, the Bank shall, before hiring a new consultant, require at a minimum,
the following:
(a) competitive bids;
(b) submission of a written proposal detailing the services to
be performed by the consultant;
(c) biographical information setting forth the applicant's
credentials and experience in this area;
- 5 -
6
(d) full disclosure to the Board of all relationships between
the consultant and any Bank executive officer, director or
principal shareholder (as those terms are defined in 12
C.F.R. Part 215). Any director whose relationship with the
consultant could be perceived as causing a conflict of
interest shall abstain from voting;
(e) that the Board vote to approve any consultant's employment;
and
(f) execution of a written contract between the Bank and
consultant based upon arms-length negotiations. Any such
contract shall, at a minimum, provide for the following:
(i) the duration of the contract;
(ii) the precise terms governing remuneration including
any salaries, benefits or expense reimbursements
that the consultant would receive; and
(iii) that any consultant's remuneration be consistent with
Banking Circular No. 115, dated August 30, 1978, and
Supplement #1, dated December 28, 1978, incorporated
herein by reference.
(4) Each quarter, the Board, or a delegated committee thereof, shall
review any consultant's performance. A report, signed by the entire Board,
shall be prepared detailing the review and setting forth whether the Bank
continues to require the consultant's services. Upon completion, a copy of the
report shall be forwarded to the Director for Special Supervision.
- 6 -
7
ARTICLE VI
SEVERANCE PLANS
(1) The Bank shall conduct a review within thirty (30) days of all
employment and severance contracts entered into with the Bank's senior officers
to determine:
(a) whether the Bank has sufficient resources to fulfill its
obligations under such agreements; and
(b) the Bank's ability to terminate or in some manner reduce or
eliminate the Bank's obligations under the agreements
without subjecting itself to potential liability for breach
of contract or otherwise.
(2) The Bank shall provide the Director for Special Supervision with a
list of all employment/severance contracts and a written report of the results
of the review required in paragraph (1) above within sixty (60) days.
(3) Prior to entering into any new employment or severance agreements,
or renewing or extending any such existing agreements with the Bank's senior
officers, the Bank shall provide the Director for Special Supervision with at
least thirty (30) days prior written notice and the Director for Special
Supervision shall have the authority to veto such agreements.
(4) Prior to honoring any employment or severance agreements with the
Bank's senior officers, other than ordinary salary and benefits payments made
to or on behalf of persons currently in the employ of and providing full time
service to the Bank, the Bank shall provide the Director for Special
Supervision with thirty (30) days written notice, (setting forth the details of
any payments involving Bank assets), and the Director for Special Supervision
shall have the authority to veto such actions.
- 7 -
8
ARTICLE VII
NEW PRODUCTS AND SERVICES
(1) Prior to the Bank's involvement in any new products, services, or lines
of business, the Board shall prepare a written analysis of said product or
service. The analysis shall, at a minimum, assess the risks and benefits of the
product, service, or line of business to the Bank. A copy of the analysis shall
be submitted to the Director for Special Supervision, prior to the Bank's
involvement in the product or service.
ARTICLE VIII
LIQUIDITY
(1) The Board shall maintain the liquidity of the Bank at a level that is
sufficient to sustain the Bank's current operations and to withstand antici-
pated or extraordinary demand against its funding base.
(2) The Board or committee thereof shall review the Bank's liquidity on a
weekly basis. Such reviews shall consider at a minimum:
(a) a maturity schedule of certificates of deposit, including
large uninsured deposits;
(b) the volatility of demand deposits including escrow deposits;
(c) the amount and type of loan commitments and standby letters of
credit;
(d) an analysis of the continuing availability and volatility of
present funding sources;
(e) an analysis of the impact of decreased cash flow from the
Bank's loan
- 8 -
9
portfolio resulting from delinquent and non-performing
loans; and
(f) an analysis of the impact of decreased cash flow from the
sale of loans or loan participations.
(3) The Board shall take appropriate action to provide adequate sources
of liquidity in relation to the Bank's needs. Weekly reports shall set forth
liquidity requirements and sources. Copies of these reports shall be forwarded
to the Director for Special Supervision.
ARTICLE IX
CAPITAL
(1) The following capital levels have been established for your bank
(as defined in 12 C.F.R. Part 3):
(a) Tier I capital at least equal to ten percent (10%) of
risk-weighted assets;
(b) Tier I capital at least equal to six and one half percent
(6.5%) of adjusted total assets(1).
(2) Within thirty (30) days, the Board shall develop a three year
capital program.
The program shall include:
(a) specific plans for the maintenance of adequate capital that
may in no event be less than the requirements of
paragraph (1);
(b) projections for growth and capital requirements based upon
a detailed
- ---------------
(1) Adjusted total assets is defined in 12 C.F.R. Section 3.2(a) as the average
total asset figure used for Call Report purposes minus end-of-quarter
intangible assets. As further noted in 12 C.F.R. Section 3.2(a), a bank may be
required to compute and maintain its leverage ratio on the basis of actual,
rather than average total assets. This language would have to be modified to
reflect that change.
- 9 -
10
analysis of the Bank's assets, liabilities, earnings, fixed
assets, and off-balance sheet activities;
(c) projections of the sources and timing of additional capital
to meet the Bank's current and future needs;
(d) the primary source(s) from which the Bank will strengthen its
capital structure to meet the Bank's needs;
(e) contingency plans that identify alternative methods should the
primary source(s) under (d) above not be available; and
(f) a dividend policy that permits the declaration of a dividend only:
(i) when the Bank is in compliance with its approved capital
program, and
(ii) with the prior written approval of the Director for Special
Supervision.
(g) a detailed analysis of any costs to be incurred by the Bank or
its Holding Company due to implementation of the capital program.
(2) Upon completion, the Bank's capital program shall be submitted to the
Director for Special Supervision for approval. Upon approval by the Director for
Special Supervision, the Bank shall implement and adhere to the capital program.
The Board shall review and update the Bank's capital program on an annual basis,
or more frequently if necessary. Copies of the reviews and updates shall be
submitted to the Director for Special Supervision.
- 10 -
11
ARTICLE X
STRATEGIC PLAN
(1) Within one hundred and twenty (120) days, the Board shall adopt
and implement a strategic plan for the Bank covering at least a three-year
period. The strategic plan shall establish objectives for the Bank's earnings
performance, growth, balance sheet mix, off-balance sheet activities, liability
structure, capital adequacy, reduction in the volume of nonperforming assets,
product line development and market segments that the Bank intends to promote
or develop, together with strategies to achieve those objectives and, at a
minimum, include:
(a) a mission statement that forms the framework for the
establishment of strategic goals and objectives;
(b) an assessment of the Bank's present and future operating
environment;
(c) an evaluation of the Bank's internal operations, staffing
requirements, board and management information systems and
policies and procedures;
(d) the development of strategic goals and objectives to be
accomplished over the short and long term;
(e) a management employment and succession program to promote
the retention and continuity of capable management;
(f) product line development and market segments that the
Bank intends to promote or develop;
(g) an action plan to improve bank earnings and accomplish
identified strategic goals and objectives to include
individual responsibilities, accountability and specific
time frames; and
- 11 -
12
(h) a financial forecast to include projections for major balance sheet
and income statement accounts and desired financial ratios over the
period covered by the strategic plan.
(2) Upon adoption, a copy of the plan shall be forwarded to the Director for
Supervision for review.
ARTICLE XI
LOAN ADMINISTRATION
(1) The Board shall, within sixty (60) days, develop and implement a written
program to improve the Bank's loan administration. The program shall include,
but not be limited to:
(a) procedures to ensure satisfactory and perfected collateral
documentation;
(b) procedures to ensure that extensions of credit are granted,
by renewal or otherwise, to any borrower only after obtaining
and analyzing current and satisfactory credit information; and
(c) procedures to ensure the accuracy of internal management
information systems.
(2) Upon completion, a copy of the program shall be forwarded to the
Director for Special Supervision.
- 12 -
13
ARTICLE XII
FORMAL AGREEMENT
(1) Although the Board has agreed to submit certain programs and
reports to the Director for Special Supervision for review or approval, the
Board has the ultimate responsibility for proper and sound management of the
Bank.
(2) It is expressly and clearly understood that if at any time, the
Comptroller deems it appropriate in fulfilling the responsibilities placed upon
him by the several laws of the United States of America to undertake any action
affecting the Bank, nothing in this Agreement shall in any way inhibit, estop,
bar, or otherwise prevent the Comptroller from so doing.
(3) Any time limitations imposed by this Agreement shall begin to run
from the effective date of this Agreement. Such time requirements may be
extended by the Director for Special Supervision for good cause upon written
application by the Board.
(4) The provisions of this Agreement shall continue in full force and
effect unless or until such provisions are amended by mutual consent of the
parties to the Agreement or excepted, waived, or terminated by the Comptroller.
IN TESTIMONY WHEREOF, the undersigned, authorized by the Comptroller,
has hereunto set his hand on behalf of the Comptroller.
/s/ Ronald G. Schneck 12/12/95
- --------------------------------- --------
Ronald G. Schneck Date
Director for Special Supervision
- 13 -
14
IN TESTIMONY WHEREOF, the undersigned, as the duly elected and acting
Board of Directors of the Bank, have hereunto set their hands on behalf of the
Bank.
/s/ A. Thomas Hickey 12/14/95
- ------------------------- --------
A. Thomas Hickey Date
/s/ Alan Grahm 12/14/95
- ------------------------- --------
Alan Grahm Date
/s/ Howard P. Ladd 12/14/95
- ------------------------- --------
Howard P. Ladd Date
/s/ Scott A. Montgomery 12/14/95
- ------------------------- --------
Scott A. Montgomery Date
/s/ Robert E. Thomson 12/14/95
- ------------------------- --------
Robert E. Thomson Date
- 14 -