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FDIC Enforcement Decisions and Orders

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{{8-31-92 p.C-453}}
   [10,086] In the Matter of Mayfair Bank, Chicago, Illinois, Docket No. FDIC-90-113b (6-28-90).

   Bank to cease and desist from practices such as engaging in hazardous lending and lax collection practices; violating state and federal laws and regulations; operating with inadequate capital, with excessive adversely classified assets, with excessive overdue and nonaccrual loans, and with inadequate allowance for loan and lease losses; operating without adequate internal controls and without policies to control asset growth; operating with a management whose policies and practices are detrimental to the Bank; and operating with a Board of Directors that has failed to supervise the management of the Bank. (This order was terminated by order of the FDIC dated 6-9-92; see15,460.)

   [.1] Primary Capital—Increase Methods
   [.2] Board of Directors—Responsibility—Capital Protection
   [.3] Management—Qualifications—Compliance
   [.4] Loan Policy—Minimum Requirements—Review
   [.5] Loans—Risk Position—Minimum Requirements
   [.6] Loans—Loan Concentration—Reduce
   [.7] Violations of Law—Eliminate/Correct—Compliance
   [.8] Assets—Adversely Classified—Reduce
   [.9] Loan Loss Reserve—Adequacy—Review
   [.10] Loans—Extension of Credit—Curtail
   [.11] Deficiencies Listed as Special Mention—Correct
   [.12] Profit Plan—Minimum Requirements—Review
   [.13] Assets—Increase—Limitation
   [.14] Audits—Statement of Policy—External Auditing Programs
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   [.15] Bank Operations—Internal Routine and Controls—Correct Deficiencies
   [.16] Audits—External Audit—Review
   [.17] Shareholders—Dividends—Approval
   [.18] Shareholders—Disclosure—Cease and Desist Order
   [.19] Board of Directors—Compliance Committee—Written Report
   [.20] Compliance—Progress Reports—Frequency

In the Matter of

MAYFAIR BANK
CHICAGO, ILLINOIS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Mayfair Bank, Chicago, Illinois ("Bank"), having been advised of its right to a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices and violations of law and regulation alleged to have been committed by the Bank and of its right to a hearing on the charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated June 5, 1990, whereby solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices and violations of law and regulation, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and violated laws and regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and its successors and assigns, cease and desist from the following unsafe or unsound banking practices and violations of law and regulation listed below. Each of the general items listed below refers specifically to conduct or practices described in the FDIC Report of Examination dated November 11, 1989 ("Report").
   A. Engaging in hazardous lending and lax collection practices;
   B. Violating the State of Illinois legal lending limit restrictions as set forth in section 32 of the Illinois Banking Act, ILL. REV. STAT., ch. 17, § 339; the suitable records requirement as set forth in section 16(8) of the Illinois Banking Act, ILL. REV. STAT., ch. 17, § 323; the overdraft requirements of section 215.4(d) of Regulation O of the Board of Governors of the Federal Reserve System, ("Regulation O"), 12 C.F.R. § 215.4(d); the recordkeeping requirements of section 215.7 of Regulation O, 12 C.F.R. § 215.7; the unsecured lending restrictions of section 23A of the Federal Reserve Act, 12 U.S.C. § 371c; the minimum capital requirements of section 325.3 of the FDIC's Rules and Regulations, 12 C.F.R. § 325.3; the lobby notice requirements of section 350.7(b) of the FDIC's Rules and Regulations, 12 C.F.R. § 350.7(b); the standby letters of credit recordkeeping requirements of section 337.2 of the FDIC's Rules and Regulations, 12 C.F.R. § 337.2; and the financial recordkeeping requirements of sections 103.27 and 103.34 of the FDIC's Rules and Regulations, 31 C.F.R. §§ 103.27 and 103.35;
   C. Operating with inadequate capital;
   D. Operating with an excessive level of classified assets;
   E. Operating with an excessive level of overdue and nonaccrual loans;
   F. Operating without adequate policies to monitor and control asset growth;
   G. Operating with an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans held;
   H. Operating without adequate internal routine and controls;
   I. Operating with a management whose policies and practices are detrimental to the Bank and which jeopardize the safety of its deposits; and
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   J. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management of the Bank.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. (a) Within 30 days from the effective date of this ORDER, the Bank shall formulate and adopt a written plan to increase primary capital by not less than $2,000,000 by September 30, 1990. Such an increase may be accomplished in the following manner:

       (i) By the sale of common stock in accordance with the laws of the State of Illinois;
       (ii) By direct contribution from the directors and/or shareholders;
       (iii) From cash payments received on any assets that were previously charged off or cash payments received on any assets that were classified Loss in the FDIC Report of Examination;
       (iv) any means acceptable to the Regional Director; or
       (v) Any combination of the above.
   (b) The written plan required to be developed by this paragraph shall be submitted to the Regional Director for review and comment. Within 30 days of receipt of any comment from the Regional Director, and after amending the plan in accordance with any recommended changes, the Bank shall approve and implement the plan. The approval shall be recorded in the minutes of a board of directors' meeting.
   (c) Within 30 days from each June 30 and December 31 following the date of required compliance with paragraph 1(a) of this ORDER, the Bank's board of directors shall determine the Bank's primary capital as a percentage of the daily average of its total assets for the quarter preceding the respective June 30 and December 31 dates. If that percentage is less than 8.0 percent, the Bank's board of directors shall, within 60 days from the date of that review, increase that capital/asset relationship to not less than 8.0 percent as of the end of that preceding semi-annual period. For the purpose of this paragraph 1(c), the terms "primary capital" and "total assets" shall be defined as those terms are defined in Part 325 of the FDIC's Rules and Regulations.
   (d) If all or part of the increase in primary capital required by this paragraph is to be accomplished by the sale of new securities, the board of directors of the Bank shall forthwith adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held by or controlled by them in favor of said plan. Should the implementation of the plan involve public distribution of the Bank securities, including a distribution limited only to the Bank's existing shareholders, the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation of the plan and, in any event, not less than twenty (20) days prior to the dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC at Washington, D.C., for its review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (e) In complying with the provisions of paragraph 1(d) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Bank stock. The written notice required by this paragraph shall be furnished within ten (10) calendar days from the date any material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of the Bank securities who received or was tendered the information contained in the Bank's original offering materials.

   [.2] (f) The formal capital ratio analysis as of June 30 and December 31 of each year described in paragraph 1(c) of the ORDER shall not negate the responsibility of the Bank and its board of directors for maintaining throughout the year an adequate level of capital protection for the kind, {{4-1-90 p.C-456}}quality and degree of market depreciation of assets held by the Bank.

   [.3] 2. (a) Within 90 days from the effective date of this ORDER, the Bank shall have, and thereafter retain, qualified executive officers. Each executive officer shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. During the life of this ORDER, the Bank shall promptly notify the Regional Director of any changes in any of the Bank's executive officers not otherwise required by section 32 of the Act, 12 U.S.C. 1831(i), ("section 32") and shall submit to the Regional Director a written statement of the qualifications of any new executive officer. The notification must include the name and background of any replacement personnel and must be provided prior to the individual assuming the new position. For purposes of this paragraph, "executive officer" shall have the meaning ascribed that term in section 215.2(d) of Regulation O, 12 C.F.R. 215.2(d).
   (b) The qualifications of executive officers shall be assessed on their ability to:

       (i) Comply with the requirements of this ORDER;
       (ii) Operate the Bank in a safe and sound manner;
       (iii) Comply with applicable laws and regulations; and
       (iv) Restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and effective internal control.

   [.4] 3. (a) Within 60 days from the effective date of this ORDER, and at least annually thereafter, the Bank shall review its loan policy and practices for adequacy and, based upon this review, shall make appropriate revisions in the policy which are necessary to strengthen lending procedures and abate additional loan deterioration. The reviews required by this paragraph shall be recorded in the minutes of the board of directors' meeting.
   (b) The initial revision of the Bank's loan policy required by this paragraph, at a minimum, shall include the following:
       (i) Provisions which address: the board's responsibility in reviewing and approving loans; complete guidelines for rates of interest and terms of repayment for secured and unsecured loans; limitations on the amount advanced in relation of all types of collateral, especially business assets; guidelines for obtaining and reviewing real estate appraisals, as well as for ordering reappraisals when needed; maintenance and review of complete, accurate and current credit files, and financial information on each borrower; appropriate and adequate collection procedures; and limitations on the extension of credit through overdrafts.
       (ii) A provision requiring that all extensions of credit originated or renewed above $5,000 be supported by complete financial data attested to by the borrower under penalty of perjury, and where applicable, complete collateral documentation; have a clearly defined purpose; have any adverse credit report information fully explained; and have a predetermined repayment source and schedule.
       (iii) Provisions requiring loan committee review and monitoring of the status of repayment and collection of overdue and maturing loans, as well as those loans which were classified "Substandard" or "Doubtful" in the Report, or in any future examination conducted by the FDIC or State Authorities.
       (iv) Provisions requiring the establishment and maintenance of a loan grading system and internal loan watch list.
       (v) Provisions requiring a written plan to lessen the Bank's risk position in each line of credit identified as a problem on the Bank's internal loan watch list.
       (vi) Provisions requiring a nonaccrual policy in accordance with the Federal Financial Institutions Examinations Council's ("FFIEC") instructions for the Consolidated Reports of Condition and Income.
   (c) Within 60 days from the effective date of this ORDER, the Bank shall implement a written, detailed internal audit program designed to monitor and ensure compliance with the Bank's loan policy and procedures.
   (d) The written loan policy and audit program required to be developed by this paragraph shall be submitted to the Regional Director for review and comment. Within 30 days from the receipt of comment from the Regional Director, and after amending the loan policy and audit program in accordance with any recommended changes, the Bank shall approve and implement the loan policy and audit program. {{4-1-90 p.C-457}}The approvals shall be recorded in the minutes of the board of directors' meeting.

   [.5] 4. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and adopt a written plan to lessen the Bank's risk position in each line of credit in excess of $10,000 which is classified "Substandard" or "Doubtful" in the Report. Such plan shall include, but not be limited to, the following:

       (i) Dollar levels to which the Bank will reduce each line of credit within 6 to 12 months from the effective date of this ORDER;
       (ii) Provisions for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors; and
       (iii) Provisions for the submission of bi-monthly written progress reports to the Regional Director.
   (b) The written plan required to be developed by this paragraph shall be submitted to the Regional Director for review and comment. Within 30 days from receipt of any comment from the Regional Director, and after amending the plan in accordance with any recommended changes, the Bank shall approve and implement the plan. The approval shall be recorded in the minutes of a board of directors' meeting.

   [.6] 5. The Bank's concentration of loans to businesses which export or import goods from Korea shall not exceed the following limits:
   (a) Loans to businesses which deal in goods in any one Standard Industry Code ("SIC") shall not exceed 50% of the Bank's equity capital and reserves at any one time.
   (b) Loans to all businesses which export goods to or import goods from Korea shall not exceed 150% of the Bank's equity capital and reserves at any one time.

   [.7] 6. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and or/regulation described on pages 6-b through 6-b-3 of the Report. In addition, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.8] 7. Within 30 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" in the Report. These charge-offs should be reflected on the Bank's Reports of Condition and Income as of December 31, 1989. Reports of Condition and Income required by the FDIC as of December 31, 1989, shall be amended and refiled if they do not reflect the charge-off of these items. Reduction of these assets with proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.

   [.9] 8. (a) Within 30 days from the effective date of this ORDER, the Bank shall replenish its loan valuation reserve by an expense entry in an amount equal to those loans required to be charged off by paragraph 7 of this ORDER.
   (b) Within 30 days from the effective date of this ORDER, the Bank shall make a provision to the loan valuation reserve which, after careful review and consideration by the board of directors, reflects the potential for further losses in the "Substandard" and "Doubtful" loan classifications and all other loans in its portfolio.
   (c) Within 30 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to November 11, 1989, shall be amended and refiled if they do not reflect a provision for loan losses and loan valuation reserve which are adequate considering the condition of the Bank's loan portfolio and which, at a minimum, incorporate the adjustments required by this paragraph.
   (d) Prior to the submission or publication of all Reports of Condition and Reports of Income required by the FDIC after the effective date of this ORDER, the Bank shall review the adequacy of the loan valuation reserve and accurately report the same. The minutes of the board of directors' meeting at which such review is undertaken shall indicate the results of the review, the amount of the increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.

   [.10] 9. (a) Following the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who is already obligated in any manner to the Bank on any extensions of credit (including {{4-1-90 p.C-458}} any portion thereof) that have been charged off the books of the Bank so long as such credit remains uncollected.
   (b) Following the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Substandard", or is listed for "Special Mention" and is uncollected, unless the Bank's board of directors has adopted a detailed written statement of explanation which supports the extension and includes, at a minimum, the reasons why extending such credit is in the best interests of the Bank. A copy of the statement shall be placed in the appropriate loan file and recorded in the minutes of the applicable board of directors' meeting.

   [.11] 10. Within 60 days from the effective date of this ORDER, the Bank shall correct all deficiencies in those assets listed for "Special Mention" in the Report.

   [.12] 11. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and fully implement a written Profit Plan. This plan shall address, at a minimum, the following:

       (i) Goals and strategies for improving and sustaining the earnings of the Bank, including:
         (a) an identification of the major areas in, and means by which, the board will seek to improve the Bank's operating performance;
         (b) realistic and comprehensive budgets;
         (c) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections;
         (d) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components; and
         (e) periodic salary review.
       (ii) Coordination of the Bank's loan, investment, and operating policies and budget and profit planning, with the funds management policy.
   (b) The written plan required to be developed by this paragraph shall be submitted to the Regional Director for review and comment. Within 30 days from receipt of any comment from the Regional Director, and after amending the plan in accordance with any recommended changes, the Bank shall approve and implement the plan. The approval shall be recorded in the minutes of a board of directors' meeting.

   [.13] 12. During the life of this ORDER, the Bank shall not increase its total assets by more than three percent during any consecutive three month period without first providing at least 30 days prior to its implementation, a growth plan to the Regional Director. Such growth plan shall include the funding source to support the projected growth, as well as the anticipated use of funds. This growth plan shall not be implemented without the prior written consent of the Regional Director. For the purpose of this paragraph, "total assets" has the meaning ascribed to that term by the FFIEC's instructions for the Consolidated Reports of Condition and Income.
   13. (a) Within 90 days from the effective date of this ORDER, the Bank shall:

   [.14] (i) Take steps to bring the Bank into conformance with the FDIC's Statement of Policy Regarding Independent External Auditing Programs of State Nonmember Banks. Such steps, which include the board of directors' reasoning, shall be recorded in the Bank's board of directors' minutes and forwarded to the Regional Director for review.

   [.15] (ii) Correct the deficiencies in internal routine and controls described on pages 6-c through 6-c-1 in the Report.

   [.16] (b) Within 60 days from the effective date of this ORDER, the Bank shall provide for an External Audit of its financial statements and operating procedures to be performed by an external, independent accounting firm acceptable to the Regional Director.
   (c) During the life of this ORDER, the Bank shall forward copies of any external audit reports required by this paragraph to the Regional Director within 10 days from the Bank's receipt of such reports.

   [.17] 14. During the life of this ORDER, the Bank shall not declare or pay any dividends without the prior written approval of the Regional Director.

   [.18] 15. Following the effective date of this ORDER, but prior to August 31, 1990, the Bank shall send to its shareholders, or otherwise furnish a description of this ORDER: (1) in conjunction with the Bank's next shareholder communication; and (2) in conjunction with its notice or proxy state- {{12-31-90 p.C-459}}ment preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement or notice shall be sent to the FDIC at Washington, D.C. for review at least twenty (20) days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice or statement.

   [.19] 16. Within 30 days from the effective date of this ORDER, the Bank shall establish a compliance committee comprised of at least three directors. No committee member may be an executive officer or principal shareholder, as those terms are defined in sections 215.2(d) and (j) of Regulation O, 12 C.F.R. §§215.2(d) and (j). The committee shall monitor compliance with this ORDER, and on a monthly basis, shall submit to the board of directors a written report detailing the Bank's compliance with this ORDER, including compliance with its written loan and audit policies. The monthly compliance report shall be incorporated into the minutes of a board of directors' meeting.

   [.20] 17. On the last day of the second month following the date of issuance of this ORDER, and every third month thereafter, the Bank shall furnish written progress reports to the Regional Director detailing the form and manner of any actions taken to secure compliance with the ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has, in writing, released the Bank from making further reports.
   The effective date of this ORDER shall be 10 days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and its successors and assigns.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any suspended, or set aside by the FDIC.
   Pursuant to delegated authority.
   Dated: June 28, 1990.

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