Exhibit 10.2
SUPERVISORY AGREEMENT
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This Supervisory Agreement (Agreement) is made and effective this _24th_
day of April 2009 (Effective Date), by and through the Board of Directors
(Board) of Los Padres Bank, Solvang, California, OTS Docket No. 07935
(Association), and the Office of Thrift Supervision (OTS), acting by and through
its Regional Director for the Western Region (Regional Director).
WHEREAS, based on its Report of Examination of the Association issued
November 12, 2008 (Report of Examination), OTS finds that the Association has
engaged in acts and practices that are unsafe and unsound; and
WHEREAS, OTS is the primary federal regulator of the Association pursuant
to the Home Owners' Loan Act (HOLA), 12 USC ss.ss. 1461 et seq., and is the
Association's appropriate Federal banking agency for purposes of the Federal
Deposit Insurance Act (FDIA), 12 USC ss.ss. 1811 et seq.; and
WHEREAS, in furtherance of their common goal to ensure that the Association
continues to address the unsafe and unsound acts and practices and weaknesses
and deficiencies identified by OTS, the Association and OTS have mutually agreed
to enter into this Agreement; and
WHEREAS, on April 23rd 2009, the Association's Board, at a duly constituted
meeting adopted a resolution (Board Resolution) that authorizes the Association
to enter into this Agreement and directs compliance by the Association and its
directors, officers, employees, and other institution-affiliated parties with
each and every provision of this Agreement.
NOW THEREFORE, in consideration of the above premises, it is agreed as
follows:
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Capital
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1. The Association shall have and maintain Tier 1 and risk-based capital as
follows:
a. On and after June 30, 2009, the Association shall have and maintain
a Tier 1 capital ratio of at least six (6) percent and a total risk-based
capital ratio of at least eleven (11) percent.
b. On and after September 30, 2009, the Association shall have and
maintain a Tier 1 capital ratio of at least seven (7) percent and a total
risk-based capital ratio of at least twelve (12) percent.
2. Within thirty (30) days from the Effective Date, the Board shall adopt
and submit to OTS a written plan to preserve and maintain the Association's
capital at the levels prescribed in Paragraph 1 (Capital Augmentation Plan). At
a minimum, the Capital Augmentation Plan shall:
a. Consider the requirements and restrictions imposed by this
Agreement;
b. Consider and address different scenarios based on current asset
quality trends and real estate market conditions;
c. Require the Senior Executive Officers (Management) to continually
assesses the sufficiency of the Association's capital levels relative to
the Association's risk profile, classified asset levels, allowance for loan
and lease losses (ALLL), earnings, level of construction loans, and trends
in all of the above-listed areas;
d. Establish the timeframes by which additional capital will be raised;
e. Detail the method by which the additional capital will be raised and
identify the sources of such capital;
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f. Establish an alternative strategy, including but not limited to,
seeking a merger or acquisition partner, to be implemented immediately if
the Board's primary strategy to raise additional capital is unsuccessful;
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 Augmentation Plan and the Association's current
capital levels (Capital Status Report).
3. Effective immediately, the Board shall: (a) review the Association's
capital levels and the Capital Status Report at each regular monthly Board
meeting; and (b) ensure that Management continually assesses the sufficiency of
the Association's capital levels relative to the factors listed in Paragraph
2.c. above. The Board's review shall be fully detailed in the Board meeting
minutes. A copy of the Capital Status Report, any supporting documents, reports,
or other information reviewed by the Board, and the Board meeting minutes
detailing the Board's review, shall be provided to the Regional Director within
ten (10) days after the Board meeting.
Business Plan
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4. Within thirty (30) days from the Effective Date, the Board shall adopt
and submit to OTS a written comprehensive plan (Business Plan), to return the
Association to long-term profitability covering at least 2009 through 2011. At a
minimum, the Business Plan shall include:
a. A detailed discussion of the Association's existing and future
operations and lines of business for the time period covered by the
Business Plan, including lending, investments, and funding;
b. Specific strategies for improving the Association's profitability;
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c. A detailed analysis of the risks attendant to the activities
projected in the Business Plan and a full description of the steps to be
taken to mitigate such risks;
d. Defined strategies for capital preservation and enhancement to, at a
minimum, meet and maintain the capital requirements set forth in Paragraph
1; and
e. Pro forma balance sheets, income statements and regulatory capital
schedules for each quarter of the time period covered by the Business Plan.
Concentration Policy
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5. Within thirty (30) days from the Effective Date, the Board shall adopt
and submit to OTS a revised comprehensive concentration policy (Concentration
Policy) that sets limits for the Association's concentrations for both loans and
investments (expressed as a percentage of core capital plus ALLL). The
concentration limits should be consistent with the Business Plan required in
Paragraph 4 and Section 201.4 of the OTS Examination Handbook (Limits and
Guidelines for Concentrations of Credit).
6. The Concentration Policy shall also set limits for the Association's
concentrations of funding sources.
Liquidity Policy
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7. Within thirty (30) days from the Effective Date, the Board shall adopt
and submit to OTS 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 OTS in a frequency
satisfactory to OTS.
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Internal Asset Review Policy
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8. Within thirty (30) days from the Effective Date, the Board shall adopt
and submit to OTS 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, and consistent with the
requirements of OTS Chief Executive Officer Memorandum No. 140. The IAR Policy
shall fully address the comments made in the Report of Examination and shall
establish timeframes and procedures for reporting the results of all independent
asset reviews to the Board for consideration. Particular emphasis should be
applied to commercial lending and the commercial loan portfolio. 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.
9. 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 thirty (30) days after the close of
each calendar quarter beginning with the quarter ending on March 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.
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Comments by OTS; Adoption by Board
10. Following submission and review by the OTS, the Board shall make any
changes to the Capital Augmentation Plan, Business Plan, and the Concentration,
Liquidity, and IAR policies (collectively Foregoing Policies) within fifteen
(15) days after receipt of any comments from OTS. Thereafter, the Board shall
adopt the Capital Augmentation Plan, Business Plan, and Foregoing Policies and
ensure that the Association implements and adheres to them. Any request to
modify the Capital Augmentation Plan, Business Plan, and Foregoing Policies
shall be submitted to OTS for review and written non-objection at least thirty
(30) days prior to the proposed date to implement such modification.
Variance Reports
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11. Management shall prepare quarterly variance reports on the
Association's compliance with the Capital Augmentation Plan and Business Plan
within thirty (30) days after the close of each quarter beginning with the
quarter ending June 30, 2009. Such variance reports shall detail actual
operating results versus projected results and shall include detailed
explanations of any material deviations with a description of the specific
corrective actions or measures that have been implemented or are proposed to
address the material deviation. The Board shall review the variance reports on a
quarterly basis, and shall discuss Association's compliance with the Capital
Augmentation Plan and Business Plan. The Board's review of the variance reports
and evaluation of the Association's compliance with the material elements of the
Capital Augmentation Plan and Business Plan shall be thoroughly documented in
the Board meeting minutes.
12. Within ten (10) days after the date of the Board meeting at which the
Board's review of the variance reports is conducted, the Board shall provide OTS
with a copy of Management's quarterly variance reports and the Board meeting
minutes detailing the Board's review of the variance reports, including the
identification of any corrective actions adopted by the Board and the Board's
evaluation and assessment of the Association's compliance with the Capital
Augmentation Plan and Business Plan.
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Independent Third-Party Review of Commercial Loan Portfolio
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13. The Association has engaged the services of an independent third-party
consultant acceptable to OTS (Consultant) to review the Association's commercial
loan portfolio for the purpose of determining whether the classification and
loss recognition applicable to those assets are appropriate and in compliance
with 12 CFR ss. 560.160 and OTS Examination Handbook ss. 260.
14. Within forty-five (45) days from date of the Association's initial
engagement of the Consultant, the Consultant shall deliver a final, written
report (Report) containing the findings and recommendations of the Consultant to
the OTS and the Board. The Report shall contain, at a minimum: (a) a
recommendation for classification of each loan reviewed, including support for
each such recommended classification; and (b) recommendations for improvement of
classification and loss recognition processes applicable to the commercial loan
portfolio.
Independent Third-Party Review of ALLL Methodology
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15. The Association has engaged the services of an independent third-party
consultant acceptable to OTS (Consultant) to review the Association's ALLL
Methodology to determine: (a) whether the ALLL Methodology is adequate given the
Association's risk profile; and (b) whether the ALLL Methodology is in
accordance with all relevant regulatory guidance, including, but not limited to
the December 13, 2006 Interagency Policy Statement on the Allowance for Loan and
Lease Losses (ALLL) and Questions and Answers on Accounting for Loan and Lease
Losses (2006 ALLL Policy Statement).
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16. The Consultant's review of the Association's ALLL Methodology should
consider, and document, any factors that are likely to cause estimated losses to
differ from historical loss experience. Specifically, consideration should be
given to:
a. Changes in local and national economic/business conditions;
b. Changes in the volume or type of credit extended; and
c. The existence of, or changes in, the level of concentrations of
credit.
17. Within forty-five (45) days from date of the Association's initial
engagement of the Consultant, the Consultant shall deliver a Report containing
the findings and recommendations of the Consultant to the OTS and the Board.
Submission to OTS
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18. Within ten (10) days of the Association's receipt of the foregoing
Consultants' Reports consistent with Paragraphs 14 and 17, above, the
Association shall submit to OTS for review and non-objection written action
plans that fully address the findings and recommendations contained in the
Consultants' Report, and describe the specific actions the Board has taken or
proposes to take pursuant to the findings and recommendations contained in those
Reports.
19. The Board shall make any changes to the written action plans required
by OTS within fifteen (15) days after receipt of OTS's comments. Thereafter, the
Board shall adopt the written action plans and ensure that the Association
implements and adheres to them. Any request to modify the written action plans
shall be submitted to OTS for review and written non-objection at least thirty
(30) days prior to the proposed date to implement such modification. Any
deviation from the written action plans shall be a violation of this Agreement.
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Brokered Deposit Restriction
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20. Effective immediately, the Association shall comply with the
requirements of 12 CFR ss. 337.6(b)(2) and shall not, without obtaining a prior
written approval of the Federal Deposit Insurance Corporation (FDIC) pursuant to
12 CFR ss. 337.6(c): (a) accept, renew or roll over any brokered deposit, as
that term is defined at 12 CFR ss. 337.6(a)(2); or (b) act as a deposit broker,
as that term is defined at 12 CFR ss. 337.6(a)(5).
Investment Securities and Derivative Instrument Restrictions
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21. 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 OTS.
Schedule CMR Reporting
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22. 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 - Schedule CMR. Such documentation shall
include, at a minimum, information supporting price discovery such as Bloomberg
valuations, valuations from pricing services, or documented results of the
Association's internal valuation model.
Restriction on Asset Growth
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23. Effective immediately, unless permitted in writing in advance by the
OTS, the Association shall limit its asset growth in any quarter to an amount
not to exceed net interest credited on deposit liabilities during the quarter.
See OTS Regulatory Bulletin 3b.
Notice of Change of Director or Senior Executive Officer
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24. Effective immediately, the Association is required to notify the OTS of
the proposed addition of any individual to the board of directors or the
employment of any individual as a senior executive officer or changing of
responsibilities of any senior executive officer at least thirty (30) days
before such addition or employment or change becomes effective, as required by
12 CFR ss. 563.560(a)(1)(ii) and 12 USC ss. 1831i.
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Golden Parachute Restrictions
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25. Effective immediately, the Association shall not make any golden
parachute payment(1) or prohibited indemnification payment(2) unless, with
respect to each such payment, the Association has complied with the requirements
of 12 CFR Part 359 and, as to indemnification payments, 12 CFR ss. 545.121.
Notice of Contractual Arrangements Involving Compensation
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26. Effective immediately, the Association shall not enter into, renew,
extend or revise any contractual arrangement related to compensation or benefits
for any director or officer of the Association, unless it first: (a) provides
OTS with a minimum of thirty (30) days advance written notice of a proposed
transaction; and (b) receives a written notice of non-objection from the OTS.
See OTS Examination Handbook ss. 310 (p. 310.17).
27. The notice to OTS shall include a copy of the proposed employment
contract or compensation arrangement or a detailed, written description of the
compensation arrangement to be offered to such officer or director, including
all benefits and perquisites. The Board shall ensure that any contract,
agreement or arrangement submitted to OTS fully complies with the requirements
of 12 CFR Part 359, 12 CFR ss.ss. 563.39 and 563.161(b), and 12 CFR Part 570 -
Appendix A.
Contracts Outside of the Ordinary Course of Business
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28. Effective immediately, the Association shall not enter into any
third-party contracts outside of the Association's normal course of business
without the prior written non-objection of the OTS. To seek such non-objection
the Association shall provide a minimum of thirty (30) days advance written
notice to the OTS of any such proposed contract. At a minimum, such notice shall
set forth the Association's reasons for seeking the contract and shall transmit
a copy of the proposed contract. See Examination Handbook ss. 310 (pp. 310.20 &
21) and OTS Thrift Bulletin 82a.
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(1) The term "golden parachute payment" is defined at 12 CFRss. 359.1(f).
(2) The term "prohibited indemnification payment" is defined at 12 CFR ss.
359.1(l).
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Transactions with Affiliates Restriction
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29. Effective immediately, the Association may not engage in any
transaction with any affiliate or subsidiary (other than exempt transactions
under 12 CFR Part 223). The Association shall provide a thirty (30) day advance
written notice to the OTS of any proposed affiliate or subsidiary transaction
that includes a full description of the transaction. If the OTS does not respond
within the thirty (30) day notice period, the Association may proceed with the
transaction. 12 CFR ss. 563.41(c)(4).
Dividend Restriction
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30. Effective immediately, the Association shall not declare, make, or pay
any dividends (on any class of stock) or other capital distributions, as that
term is defined in 12 CFR ss. 563.141, or redeem any capital stock without
receiving the prior written non-objection of OTS. The Association's written
request for such non-objection shall be submitted to OTS at least thirty (30)
days prior to the anticipated date of the proposed dividend payment or capital
distribution.
Effective Date
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31. This Agreement is effective on the Effective Date as shown on the first
page.
Duration
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32. This Agreement shall remain in effect until terminated, modified, or
suspended by written notice of such action by OTS, acting by and through its
authorized representatives.
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Time Calculations
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33. Calculation of time limitations for compliance with the terms of this
Agreement run from the Effective Date and shall be based on calendar days,
unless otherwise noted.
34. The Regional Director, or an OTS authorized representative, may extend
any of the deadlines set forth in the provisions of this Agreement upon written
request by the Association that includes reasons in support for any extension.
Any OTS extension shall be made in writing.
Submissions and Notices
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35. All submissions, including progress reports, to OTS that are required
by or contemplated by the Agreement shall be submitted within the specified
timeframes.
36. Except as otherwise provided herein, all submissions, requests,
communications, consents or other documents relating to this Agreement 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 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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Timothy J. Lane, Assistant Director
Office of Thrift Supervision, Western Region
1551 N. Tustin Avenue, Suite 1050
Santa Ana, CA 92705
b. To the Association:
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Attn: Craig J. Cerny
Los Padres Bank
610 Alamo Pintado Road
Solvang, CA 93463
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No Violations Authorized
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37. Nothing in this Agreement shall be construed as allowing the
Association, its Board, officers or employees to violate any law, rule, or
regulation.
OTS Authority Not Affected
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38. Nothing in this Agreement shall inhibit, estop, bar or otherwise
prevent OTS from taking any other action affecting the Association if at any
time OTS deems it appropriate to do so to fulfill the responsibilities placed
upon OTS by law.
Other Governmental Actions Not Affected
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39. The Association acknowledges and agrees that its execution of the
Agreement is solely for the purpose of resolving the matters addressed herein,
and does not otherwise release, discharge, compromise, settle, dismiss, resolve,
or in any way affect any actions, charges against, or liability of the
Association that arise pursuant to this action or otherwise, and that may be or
have been brought by any governmental entity other than OTS.
Miscellaneous
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40. The laws of the United States of America shall govern the construction
and validity of this Agreement.
41. If any provision of this Agreement is ruled to be invalid, illegal, or
unenforceable by the decision of any Court of competent jurisdiction, the
validity, legality, and enforceability of the remaining provisions hereof shall
not in any way be affected or impaired thereby, unless the Regional Director or
his designate in his or her sole discretion determines otherwise.
42. All references to OTS in this Agreement shall also mean any of the
OTS's predecessors, successors, and assigns.
43. The section and paragraph headings in this Agreement are for
convenience only and shall not affect the interpretation of this Agreement.
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44. The terms of this Agreement represent the final agreement of the
parties with respect to the subject matters thereof, and constitute the sole
agreement of the parties with respect to such subject matters.
Enforceability of Agreement
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45. This Agreement is a "written agreement" entered into with an agency
within the meaning and for the purposes of Section 8 of the FDIA, 12 USC ss.
1818.
Signature of Directors/Board Resolution
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46. Each Director signing this Agreement attests that he or she voted in
favor of a Board Resolution authorizing the consent of the Association to the
issuance and execution of the Agreement. A copy of the Board Resolution
authorizing execution of this Agreement shall be delivered to OTS, along with
the executed original(s) of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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WHEREFORE, OTS, acting by and through its Regional Director, and the Board
of the Association, hereby execute this Agreement.
LOS PADRES BANK OFFICE OF THRIFT SUPERVISION
Solvang, California
By: /s/_Craig J. Cerny By: /s/ Edwin Chow
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Craig J. Cerny, Chairman Edwin Chow, Deputy
Regional Director
Western Region
Date: See Effective Date
on page 1
/s/ Paul O. Halme
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Paul O. Halme, Director
/s/ Tim Hatlestad
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Tim Hatlestad, Director
/s/ Mark R. Larrabee
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Mark R. Larrabee, Director
/s/ John J. McConnell
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John J. McConnell, Director
/s/ William D. Ross
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William D. Ross, Director
/s/ William W. Phillips, Jr.
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William W. Phillips, Jr., Director
/s/ Susan C. Weber
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Susan C. Weber, Director
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