UNITED STATES OF AMERICA

BEFORE THE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

WASHINGTON, D.C.

Written Agreement by and among
     
Docket Nos.   
10-025-WA/RB-HC
UNITED SECURITY BANCSHARES
 
10-025-WA/RB-SM
Fresno, California
         
UNITED SECURITY BANK
   
Fresno, California
         
and
         
FEDERAL RESERVE BANK
   
  OF SAN FRANCISCO
   
San Francisco, California
         

WHEREAS, in recognition of their common goal to maintain the financial soundness
of United Security Bancshares, Fresno, California (“Bancshares”), a registered
bank holding company, and its subsidiary, United Security Bank, Fresno,
California (the “Bank”), a state chartered bank that is a member of the Federal
Reserve System, Bancshares, 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 3/23 2010, the boards of directors of Bancshares and the Bank, at
duly constituted meetings, adopted resolutions authorizing and directing Mr.
Dennis Woods, President and Chief Executive Officer, to enter into this
Agreement on behalf of Bancshares and the Bank, and consenting to compliance
with each and every applicable provision of this Agreement by Bancshares and the
Bank, and their institution-affiliated parties, as defined in Sections 3(u) and
8(b)(3) of the Federal Deposit Insurance Act, as amended (the “FDI Act”) (12
U.S.C. §§ 1813(u) and 1818(b)(3)).

 
 

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NOW, THEREFORE, Bancshares, the Bank, and the Reserve Bank agree as follows:

Board Oversight

1.    Within 60 days of this Agreement, the board of directors of the Bank shall
submit to the Reserve Bank a written plan to strengthen board oversight of the
management and operations of the Bank. The plan shall, at a minimum, address,
consider, and include:

(a)    The actions that the board of directors will take to improve the
Bank’s condition and maintain effective control over, and supervision of, the
Bank’s major operations and activities, including but not limited to, credit
risk management, liquidity, and earnings;

(b)    the responsibility of the board of directors to monitor
management’s adherence to approved policies and procedures, and applicable laws
and regulations; and

(c)    a description of the information and reports that are regularly reviewed
by the board of directors in its oversight of the operations and management of
the Bank, including information on the Bank’s adversely classified assets,
allowance for loan and lease losses (“ALLL”), capital, liquidity, and earnings.

Credit Risk Management

2.    Within 60 days of this Agreement, the Bank shall submit to the Reserve
Bank an acceptable written plan to strengthen credit risk management practices.
The plan shall, at a minimum, address, consider, and include:

(a)    The responsibility of the board of directors to establish appropriate
risk tolerance guidelines and risk limits;

 
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(b)    timely and accurate identification and quantification of credit risk
within the loan portfolio;

(c)    strategies to minimize credit losses and reduce the level of problem
assets;

(d)    procedures for the on-going review of the investment portfolio to
evaluate other-than temporary-impairment (“OTTI”) and accurate accounting for
OTTI;

(e)    stress testing of CRE loan and portfolio segments; and

(f)    measures to reduce the amount of Other Real Estate Owned (“OREO”).

Asset Improvement

3.    The Bank shall not, directly or indirectly, extend, renew, or restructure
any credit to or for the benefit of any borrower, including any related interest
of the borrower, whose loans or other extensions of credit are criticized in the
report of examination of the Bank conducted by the Reserve Bank that commenced
on June 8, 2009 (the “Report of Examination”) or in any subsequent report of
examination, without the prior approval of a majority of the full board
of directors or a designated committee thereof. The board of directors or its
committee shall document in writing the reasons for the extension of credit,
renewal, or restructuring, specifically certifying that: (i) the Bank’s risk
management policies and practices for loan workout activity are acceptable; (ii)
the extension of credit is necessary to improve and protect the Bank’s interest
in the ultimate collection of the credit already granted and maximize
its potential for collection; (iii) the extension of credit reflects prudent
underwriting based on reasonable repayment terms and is adequately secured; and
all necessary loan documentation has been properly and accurately prepared and
filed; (iv) the Bank has performed a comprehensive credit analysis indicating
that the borrower has the willingness and ability to repay the debt as supported
by an adequate workout plan, as necessary; and (v) the board of directors or its
designated committee reasonably believes that the extension of credit will not
impair the Bank’s interest in obtaining repayment of the already outstanding
credit and that the extension of credit or renewal will be repaid according to
its terms. The written certification shall be made a part of the minutes of the
meetings of the board of directors or its committee, as appropriate, and a
copy of the signed certification, together with the credit analysis and related
information that was used in the determination, shall be retained by the Bank in
the borrower’s credit file for subsequent supervisory review. For purposes of
this Agreement, the term “related interest” is defined as set forth in section
215.2(n) of Regulation O of the Board of Governors of the Federal Reserve System
(“Board of Governors”) (12 C.F.R. § 215.2(n)).

 
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4.    (a)    Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank an acceptable written plan designed to improve the Bank’s position
through repayment, amortization, liquidation, additional collateral, or other
means on each loan, relationship, or other asset in excess of $1.5 million
including OREO that are past due as to principal or interest more than 90 days
as of the date of this Agreement, are on the Bank’s problem loan list, or
were adversely classified in the Report of Examination.

(b)    Within 30 days of the date that any additional loan, relationship, or
other asset in excess of $1.5 million including OREO, becomes past due as to
principal or interest for more than 90 days, is on the Bank’s problem loan list,
or is adversely classified in any subsequent report of examination of the Bank,
the Bank shall submit to the Reserve Bank an acceptable written plan to improve
the Bank’s position on such loan, relationship, or asset.

(c)    Within 30 days after the end of each calendar quarter thereafter, the
Bank shall submit a written progress report to the Reserve Bank to update each
asset improvement plan, which shall include, at a minimum, the carrying value of
the loan or other asset and changes in the nature and value of supporting
collateral, along with a copy of the Bank’s current problem loan list, a list of
all loan renewals and extensions without full collection of interest in the last
quarter, and past due/non-accrual report.

 
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Allowance for Loan and Lease Losses

5.    (a)    Within 10 days of this Agreement, the Bank shall eliminate from
its books, by charge-off or collection, all assets or portions of assets
classified “loss” in the Report of Examination that have not been previously
collected in full or charged off. Thereafter the Bank shall, within 30 days from
the receipt of any federal or state report of examination, charge off all assets
classified “loss” unless otherwise approved in writing by the Reserve Bank.

(b)    The Bank shall maintain a sound process for determining, documenting, and
recording an adequate allowance for loan and lease losses (“ALLL”) in accordance
with regulatory reporting instructions and relevant supervisory guidance,
including the Interagency Policy Statements on the Allowance for Loan and Lease
Losses, dated July 2, 2001 (SR 01-17 (Sup)) and December 13, 2006 (SR 06-17).
 
(c)    Within 60 days of this Agreement, the Bank shall submit to the Reserve
Bank an acceptable written program for the maintenance of an adequate ALLL. The
program shall include policies and procedures to ensure adherence to the Bank’s
revised ALLL methodology and provide for periodic reviews and updates to the
ALLL methodology, as appropriate. The program shall also provide for a review of
the ALLL by the board of directors on at least a quarterly calendar basis. Any
deficiency found in the ALLL shall be remedied in the quarter it is discovered,
prior to the filing of the Consolidated Reports of Condition and Income, by
additional provisions. The board of directors shall maintain written
documentation of its review, including the factors considered and conclusions
reached by the Bank in determining the adequacy of the ALLL. During the term of
this Agreement, the Bank shall submit to the Reserve Bank, within 30 days after
the end of each calendar quarter, a written report regarding the board of
directors’ quarterly review of the ALLL and a description of any changes to the
methodology used in determining the amount of the ALLL for that quarter.

 
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Capital Plan

6.    Within 90 days of this Agreement, Bancshares shall submit to the Reserve
Bank an acceptable written plan to maintain sufficient capital at Bancshares, on
a consolidated basis, and Bancshares and the Bank shall jointly submit to the
Reserve Bank an acceptable written plan to maintain sufficient capital at the
Bank, as a separate legal entity on a stand-alone basis. These plans shall, at a
minimum, address, consider, and include:

(a)    Bancshares’ current and future capital needs, including compliance
with the Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based
Measure and Tier 1 Leverage Measure, Appendices A and D of Regulation Y of the
Board of Governors (12 C.F.R. Part 225, App. A and D);

(b)    the Bank’s current and future capital needs, including compliance with
the Capital Adequacy Guidelines for State Member Banks: Risk-Based Measure and
Tier 1 Leverage Measure, Appendices A and B of Regulation H of the Board of
Governors (12 C.F.R. Part 208, App. A and B);

(c)    the adequacy of the Bank’s capital, taking into account the volume of
classified credits, concentrations of credit, ALLL, current and projected asset
growth, and projected retained earnings;

(d)    the source and timing of additional funds to fulfill the consolidated
organization’s and the Bank’s future capital requirements; and

 
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(e)    the requirements of Section 225.4(a) of Regulation Y of the Board of
Governors (12 C.F.R. § 225.4(a)) that Bancshares serve as a source of strength
to the Bank.

7.    Bancshares and the Bank shall notify the Reserve Bank, in writing, no more
than 30 days after the end of any quarter in which any of
Bancshares’ consolidated capital ratios or the Bank’s capital ratios (total
risk-based, Tier 1, or leverage) fall below the approved capital plan’s minimum
ratios. Together with the notification, Bancshares and the Bank shall submit an
acceptable written plan that details the steps Bancshares or the Bank, as
appropriate, will take to increase Bancshares’ or the Bank’s capital ratios to
or above the approved capital plan’s minimums.

Liquidity/Funds Management

8.    Within 90 days of this Agreement, the Bank shall submit to the Reserve
Bank an acceptable written plan to improve management of the Bank’s liquidity
position and funds management practices. The plan shall, at a minimum, address,
consider, and include:

(a)    Measures to enhance the monitoring, measurement, and reporting of the
Bank’s liquidity to the board of directors;

(b)    a timetable to reduce reliance on short-term wholesale funding, including
brokered deposits; and

(c)    specific liquidity targets and parameters and the maintenance of
sufficient liquidity to meet contractual obligations and unanticipated demands.

9.    Within 90 days of this Agreement, the Bank shall revise and submit to the
Reserve Bank an acceptable written contingency funding plan that, at a minimum,
includes adverse scenario planning and identifies and quantifies available
sources of liquidity for each scenario.

 
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Earnings Plan and Budget

10.   (a)    Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank a written revised business plan for the remainder of 2010 to
improve the Bank’s earnings and overall condition. The plan, at a minimum, shall
provide for or describe:

 (i)    a realistic and comprehensive budget for the remainder of calendar year
2010, including income statement and balance sheet projections; and

 (ii)   a description of the operating assumptions that form the basis for, and
adequately support, major projected income, expense, and balance sheet
components.
 
(b)    During the term of this Agreement, a business plan and budget for
each calendar year subsequent to 2010 shall be submitted to the Reserve Bank at
least 30 days prior to the beginning of that calendar year.

Dividends and Distributions

11.      (a)    Bancshares 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 (the
“Director”).

(b)    Bancshares shall not take any other form of payment representing a
reduction in capital from the Bank without the prior written approval of the
Reserve Bank.

(c)    Bancshares and its nonbank subsidiaries shall not make any distributions
of interest, principal, or other sums on subordinated debentures or trust
preferred securities without the prior written approval of the Reserve Bank and
the Director.

 
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(d)    All requests for prior approval shall be received at least 30 days prior
to the proposed dividend declaration date, proposed distribution on subordinated
debentures, and required notice of deferral on trust preferred securities. All
requests shall contain, at a minimum, current and projected information, as
appropriate, on Bancshares’ capital, earnings, and cash flow; the Bank’s
capital, asset quality, earnings and ALLL needs; and identification of the
sources of funds for the proposed payment or distribution. Bancshares and the
Bank, as appropriate, must also demonstrate that the requested declaration or
payment of dividends is consistent with the Board of Governors’ Policy Statement
on the Payment of Cash Dividends by State Member Banks and Bank Holding
Companies, dated November 14, 1985 (Federal Reserve Regulatory Service, 4-877 at
page 4-323).

Debt and Stock Redemption

12.      (a)    Bancshares shall not, directly or indirectly, incur, increase,
or guarantee any debt without the prior written approval of the Reserve Bank.
All requests for prior written approval shall contain, but not be limited to, a
statement regarding the purpose of the debt, the terms of the debt, and the
planned source(s) for debt repayment, and an analysis of the cash flow resources
available to meet such debt repayment.

(b)    Bancshares shall not, directly or indirectly, purchase or redeem any
shares of its stock without the prior written approval of the Reserve Bank.

Compliance with Laws and Regulations

13.   The Bank shall immediately take all necessary steps to correct all
violations of law and regulation cited in the Report of Examination. In
addition, the board of directors of the Bank shall take the necessary steps to
ensure the Bank’s future compliance with all applicable laws and regulations.

14.   In appointing any new director or senior executive officer, or changing
the responsibilities of any senior executive officer so that the officer would
assume a different senior executive officer position, the Bank shall comply with
the notice provisions of Section 32 of the FDI Act (12 U.S.C. § 1831i) and
Subpart H of Regulation Y of the Board of Governors of the Federal Reserve
System (the “Board of Governors”) (12 C.F.R. §§ 225.71 et seq.).

 
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15.   The Bank shall comply with the restrictions on indemnification and
severance payments of Section 18(k) of the FDI Act (12 U.S.C. § 1828(k)) and
Part 359 of the Federal Deposit Insurance Corporation’s regulations (12 C.F.R.
Part 359).

Compliance with the Agreement

16.   (a)    Within 10 days of this Agreement, the board of directors of the
Bank shall appoint a committee (the “Compliance Committee”) to monitor and
coordinate the Bank’s compliance with the provisions of this Agreement. The
Compliance Committee shall include a majority of outside directors who are not
executive officers or principal shareholders of the Bank, as defined in Sections
215.2(e)(1) and 215.2 (m)(1) of Regulation O of the Board of Governors (12
C.F.R. §§ 215.2(e)(1) and 215.2(m)(1). At a minimum, the Compliance Committee
shall meet at least monthly, keep detailed minutes of each meeting, and report
its findings to the board of directors of the Bank.

17.   Within 30 days after the end of each calendar quarter following the date
of this Agreement, Bancshares and the Bank shall submit to the Reserve Bank
written progress reports detailing the form and manner of all actions taken to
secure compliance with this Agreement and the results thereof.

Approval and Implementation of Plans and Program

18.   (a)    The Bank, and as applicable, Bancshares shall submit written plans
and a program that are acceptable to the Reserve Bank within the applicable time
periods set forth in paragraphs 2, 4(a), 4(b), 5(c), 6,7, 8, and 9 of this
Agreement.

 
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(b)    Within 10 days of approval by the Reserve Bank, the Bank, and as
applicable, Bancshares shall adopt the approved plans and program. Upon
adoption, the Bank, and as applicable, Bancshares shall promptly implement the
approved plans and program.

(c)    During the term of this Agreement, the approved plans and program shall
not be amended or rescinded without the prior written approval of the Reserve
Bank.

Communications

19.   All communications regarding this Agreement shall be sent to:

 
(a)
Mr. Joe A. Lozano
   
Examining Officer, Banking Supervision and Regulation
   
Federal Reserve Bank of San Francisco
   
101 Market Street
   
San Francisco, California 94105
       
(b)
Mr. Dennis Woods
   
President and Chief Executive Officer
   
United Security Bancshares
   
United Security Bank
2126 Inyo Street
   
Fresno, California 93721

Miscellaneous

20.   Notwithstanding any provision of this Agreement, the Reserve Bank may, in
its sole discretion, grant written extensions of time to Bancshares and the Bank
to comply with any provision of this Agreement.

21.   The provisions of this Agreement shall be binding upon Bancshares, the
Bank, and their institution-affiliated parties, in their capacities as such, and
their successors and assigns.
 
22.   Each provision of this Agreement shall remain effective and enforceable
until stayed, modified, terminated, or suspended in writing by the Reserve Bank.
 

23.   The provisions of this Agreement shall not bar, estop, or otherwise
prevent the Board of Governors, the Reserve Bank, or any other federal or state
agency from taking any other action affecting Bancshares, the Bank, or any of
their current or former institution-affiliated parties and their successors and
assigns.

 
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24.    Pursuant to Section 50 of the FDI Act (12 U.S.C. § 1831aa), this
Agreement is enforceable by the Board of Governors under Section 8 of the FDI
Act (12 U.S.C. § 1818).

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of
the 23RD of MARCH, 2010.

UNITED SECURITY BANCSHARES
 
FEDERAL RESERVE BANK
  UNITED SECURITY BANK
 
  OF SAN FRANCISCO
         
By:
/s/ Dennis Woods
 
By:
/s/ Joe A. Lozano
 
Dennis Woods
   
Joe A. Lozano
 
President and Chief Executive Officer
   
Examining Officer

 
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