Federal Deposit
Insurance Corporation

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   [¶10,109] In the Matter of Desert Sun Bank, Yuma, Arizona, Docket No. FDIC-90-175b (8-31-90).

   Bank to cease and desist from such practices as operating with inadequate management, inadequate equity capital and reserves, large volume of poor quality loans, and inadequate loan valuation reserve; operating in such a manner as to produce low earnings and in violation of laws and regulations; and operating with a consulting agreement not in the best interest of Bank. (This order was terminated by order of the FDIC dated 8-30-93; see ¶ 15, 725.)

   [.1] Management—Qualifications—Compliance
   [.2] Primary Capital—Increase—Amount—Methods
   [.3] Assets—Adversely Classified—Eliminate and/or Reduce
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   [.4] Loans—Extensions of Credit—Existing Borrower—Curtail
   [.5] Loans—Interest—Accrual
   [.6] Definition—"Well—Secured" Debt
   [.7] Definition—"In the Process of Collection"
   [.8] Loan Policy—Minimum Requirements—Revise
   [.9] Loan Loss Reserve—Adequacy
   [.10] Profit Plan—Minimum Requirements
   [.11] Violations of Law—Eliminate and/or Correct
   [.12] Consulting Agreement—Rescind
   [.13] Definition—"Compensation"
   [.14] Asset/Liability Management Policy—Standards
   [.15] Bank Operations—Internal Routine and Control Procedures
   [.16] Financial Condition Report—Amend
   [.17] Dividends—Restricted
   [.18] Brokered Deposits—Plan for Reduction
   [.19] Shareholders—Disclosure—Cease and Desist Order
   [.20] Compliance—Progress Reports—Frequency

In the Matter of

DESERT SUN BANK
YUMA, ARIZONA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-90-175b

   DESERT SUN BANK, YUMA, ARIZONA ("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/or regulations alleged to have been committed by the Bank and of its right to a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), 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 August 21, 1990, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and/or regulations, 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 had committed violations of law and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Bank, and all "institution-affiliated parties," as defined in section 3(u) of the Federal Deposit Insurance Act, 12 U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices and violations:

   (a) operating with inadequate management;
   (b) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Bank;
   (c) operating with a large volume of poor quality loans;
   (d) operating with an inadequate loan valuation reserve;
   (e) operating in such a manner as to produce low earnings;
   (f) operating in violation of section 22(h) of the Federal Reserve Act, as amended, 12 U.S.C. § 375b, as more fully described on pages 6-b, 6-b-1, and 6-b-2 of the Report of Examination as of March 16, 1990; sections 215.4(a), 215.4(b), and 215.4(d) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.4(a), 215.4(b), and 215.4(d), made applicable to state nonmember institutions by sec- {{12-31-90 p.C-524}}tion 18(j)(2) of the Act, 12 U.S.C. 1828(j)(2), as more fully described on pages 6-b, 6-b-1, and 6-b-2 of the Report of Examination as of March 16, 1990, section 7(j)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1817(j)(1), as more fully described on page 6-b-3 of the Report of Examination as of March 16, 1990; section 337.2 of the FDIC Rules and Regulations, 12 C.F.R. § 337.2, as more fully described on page 6-b-2 of the Report of Examination as of March 16, 1990; and section 103.22 of the Treasury Regulations, as more fully described on page 6-b-2 of the Report of Examination as of March 16, 1990; and

   [.1] 1. The Bank shall have and retain qualified management.

   (a) Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. Management should include a chief executive officer with proven ability in managing a Bank of comparable size, and experience in upgrading a low quality loan portfolio, improving earnings, and other matters needing particular attention. Management should also include a senior lending officer with significant appropriate lending, collection, and loan supervision experience and experience upgrading a low quality loan portfolio. Each member of management shall be provided appropriate written authority from the Bank's board of directors to implement the provisions of this ORDER.
   (b) The qualifications of management shall be assessed on its 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 liquidity.

   (c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Superintendent of Banks ("Superintendent") in writing when it proposes to add any individual to the Bank's board of directors or employ any individual as a senior executive officer. The notification must be received at least 30 days before such addition or employment is intended to become effective and should include a description of the background and experience of the individual or individuals to be added or employed.
   (d) The Bank may not add any individual to its board of directors or employ any individual as a senior executive officer if the Regional Director issues a notice of disapproval pursuant to section 32 of the Act, 12 U.S.C. § 1831(i).

   (b) Within 60 days from the effective date of this ORDER, the Bank shall develop and adopt a plan to meet the minimum risk-based capital requirements as described in the FDIC Statement of Policy on Risk-Based Capital contained in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, Appendix A. The plan shall be in a form and manner acceptable to the Regional Director and the Superintendent
{{12-31-90 p.C-525}}as determined at subsequent examinations.
   (c) Any increase in primary capital necessary to meet the requirements of Paragraph 2(a) or 2(b) of this ORDER may be accomplished by the following:

   (i) the sale of common stock; or
   (ii) the sale of noncumulative perpetual preferred stock; or
   (iii) the direct contribution of cash by the board of directors and/or shareholders of the Bank; or
   (iv) the collection of assets previously charged off; or
   (v) the reduction of the "Loss" and "Doubtful" assets specified in Paragraph 3 of this ORDER without loss or liability to the Bank; or
   (vi) any other means acceptable to the Regional Director and the Superintendent; or
   (vii) any combination of the above means.

   (d) If all or part of the increase in primary capital required by Paragraph 2(a) or 2(b) of this ORDER is accomplished by the sale of new securities, the board of directors shall forthwith take all necessary steps to adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare 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 fifteen (15) days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429, for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination. If the increase in primary capital is provided by the sale of preferred stock, then all terms and conditions of the issue, including but not limited to those terms and conditions relative to interest rate and convertibility factor, shall be presented to the Regional Director and the Superintendent for prior approval.
   (e) In complying with the provisions of Paragraph 2 of this ORDER, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities, a 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 securities. The written notice required by this paragraph shall be furnished within ten (10) days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.
   (f) For the purposes of this ORDER, the terms "primary capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. §§ 325.2(h) and 325.2(k).

   (b) Within 90 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of March 16, 1990 that have not previously been charged off to not more than $1,200,000.
   (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubt-
{{12-31-90 p.C-526}}ful" as of March 16, 1990 that have not previously been charged off to not more than $900,000.
   (d) Within 365 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of March 16, 1990 that have not previously been charged off to not more than $600,000.
   (e) The requirements of subparagraphs 3(a), 3(b), 3(c), and 3(d) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Bank shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph. As used in subparagraphs 3(b), 3(c), 3(d), and 3(e) the word "reduce" means:

   (i) to collect;
   (ii) to charge-off; or
   (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.

   (b) Beginning with 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 has a loan or other extension of credit from the Bank that has been classified, in whoe or part, "Substandard" or "Doubtful" without the prior approval of a majority of the board of directors or the loan committee of the Bank. Subparagraph 4(b) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with FASB 15, providing that such renewal or extension shall be made only with the prior approval of a majority of the board of directors or the loan committee of the Bank.

   (i) continue the accrual of interest on any loan which is delinquent in principal or interest payments ninety (90) days or more unless the asset is both well secured and in the process of collection; or
   (ii) engage in any practice or device which essentially avoids recognition of overdue loans and/or artificially inflates the income of the Bank. For any loans restructured in accordance with FASB 15, consideration should be given to the reasonableness of the modified terms of the loan, since loans should not be restructured in an attempt to conceal credit losses or delay their recognition.

   (i) collateral in the form of liens on or pledges of real or realizable value sufficient to discharge the debt (including accrued interest) in full; or
   (ii) the guaranty of a financially responsible party.

   [.8] 5. (a) Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies to provide effective guidance and control over the Bank's lending function, which policies shall include specific guidelines for placing loans on a non-accrual basis. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
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   (b) The initial revisions to the Bank's loan policy and practices, required by this paragraph, at a minimum, shall include the following:

   (i) provisions, consistent with FDIC instructions for the preparation of Reports of Condition and Income, under which the accrual of interest income is discontinued and previously accrued interest is reversed on delinquent loans;
   (ii) provisions which prohibit the capitalization of interest or loans related expense unless the board of directors supports in writing and records in the minutes of the corresponding board of directors meeting why an exception thereto is in the best interests of the Bank;
   (iii) provisions which require complete loans documentation, realistic repayment terms and current credit information adequate to support the outstanding indebtedness of the borrower. Such documentation shall include current financial information, profit and loss statements or copies of tax returns and cash flow projections;
   (iv) provisions which incorporate limitations on the amount that can be loaned in relation to established collateral values.
   (v) provisions which specify the circumstances and conditions under which real estate appraisals must be conducted by an independent third party;
   (vi) provisions which establish standards for unsecured credit;
   (vii) provisions which establish officer lending limits;
   (viii) provisions that require extensions of credit to any of the Bank's executive officers, directors, or principal shareholders, or to any related interest of such persons, to be approved in advance by a majority of the entire board of directors in accordance with section 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 215.4(b);
   (ix) provisions which prohibit the issuance of standby letters of credit unless the letters of credit are fully secured by readily marketable collateral and/or are supported by current and complete financial information;
   (x) provisions that directors first determine that the lending staff has the expertise necessary to properly supervise construction loans and that adequate procedures are in place to monitor any construction involved before funds are disbursed;
   (xi) provisions which prohibit concentrations of credit in excess of 25 percent of the Bank's total equity capital and reserves to any borrower and that borrower's related interests;
   (xii) provisions which require the preparation of a loan "watch list" which shall include relevant information on all loans in excess of $75,000 which are classified "Substandard" and "Doubtfull" as of March 16, 1990 or by the FDIC or the Arizona State Banking Department in subsequent Reports of Examination and all other loans in excess of $75,000 which warrant individual review and consideration by the board of directors as determined by the loan committee or active management. The loan "watch list" shall be presented to the board of directors for review at least monthly with such review noted in the minutes; and
   (xiii) the board of directors shall adopt procedures whereby officer compliance with the revised loans policy is monitored and responsibility for exceptions thereto assigned. The procedures adopted shall be reflected in minutes of a board of directors meeting at which all members are present and the vote of each is noted.

   [.10] 7. Within 60 days from the effective date of this ORDER, the Bank shall formulate and implement a written profit plan. This plan shall be forwarded to the Regional Director and to the Superintendent for review and comment and shall address, at a minimum, the following:

   (a) goals and strategies for improving and sustaining the earnings of the Bank, including:

   (i) an identification of the major areas in, and means by which, the board of directors will seek to improve the Bank's operating performance:
   (ii) realistic and comprehensive budgets;
   (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
   (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   (b) coordination of the Bank's loan, investment, and operating policies, and budget and profit planning, with the funds management policy.

   [.12] [.13] 9. The Bank shall rescind the December 15, 1989 Consulting Agreement between the Bank and Gordon J. Cranny. Prior to entering into any benefit or compensation plans with any current or future senior executive officers or directors, the Bank shall receive the prior written approval of the Regional Director and the Superintendent. For the purpose of this paragraph, "compensation" refers to any and all salaries, bonuses, and other benefits of every kind and nature whatsoever, whether paid directly or indirectly.

   [.14] 10. Within 60 days from the effective date of this ORDER, the board of directors shall develop a comprehensive asset/liability management policy. The policy shall establish standards consistent with generally accepted prudent banking operations by giving specific consideration to:

   (i) establishing a range for the Bank's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination, and which ratio shall, within 180 days from the effective date of this ORDER, be reduced to not more than zero (0.0) percent; and within 360 days from the effective date of this ORDER, be reduced to not more than negative fourteen ((14.0)) percent. The requirements of this paragraph shall not be construed as standards for future operations, and the Bank's volatile liability dependency ratio shall be maintained at a level consistent with prudent banking practices;
   (ii) establishing a range for short-term investments to potentially volatile liabilities, as those terms are defined by the FDIC in its current edition of "A Users Guide for the Uniform Bank Performance Report";
   (iii) establishing maturity ranges for the Bank's investment portfolio.
   (iv) establishing acceptable ranges for the Bank's rate sensitivity and gap ratios; and
   (v) the establishing of an asset/liability committee, including a description of its responsibilities, how often it will meet, how it will obtain information and guidance from the board of directors, and how its activities will be reported to the board of directors.

   [.16] 12. Within 10 days after eliminating from its books any asset in compliance with Paragraph 3 of this ORDER, the Bank shall file with the FDIC amended Consolidated Reports of Condition and Income which shall accurately reflect the financial
{{4-30-95 p.C-529}}condition of the Bank as of December 31, 1989. Thereafter, during the life of this ORDER, the Bank shall file with the FDIC Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Bank as of the end of the period for which the Reports are filed, including any adjustment in the Bank's books made necessary or appropriate as a consequence of any Arizona State Banking Department or FDIC examination of the Bank during that reporting period.

   [.17] 13. The Bank shall not pay cash dividends in any amount except as follows:

   (a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
   (b) that after payment of such dividends, the ratio of to total assets of the Bank will be not less than seven and one-half (7.5) percent;
   (c) that such declaration and payment of dividends shall be approved in advance by the board of directors; and
   (d) that such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director and the Superintendent, which approval shall not be unreasonably withheld.

   [.19] 15. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Bank's next shareholder communication and also in conjunction with its notice or proxy statement 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 send to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429, at least fifteen (15) 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.

   [.20] 16. Within 30 days of the end of the first quarter following the effective date of this ORDER, and within thirty (30) days of the end of each quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Superintendent detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports shall include a copy of the Bank's Report of Condition and the Bank's Report of Income. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Superintendent have released the Bank in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Bank, and all institution-affiliated parties.
   This ORDER shall become effective ten (10) days from the date of its issuance.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated at San Francisco, California, this 31st day of August, 1990.
   Pursuant to delegated authority.