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FDIC Enforcement Decisions and Orders

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   [10,238] In the Matter of Citizens Western Bank, San Diego, California, Docket No. FDIC-91-35b (5-14-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate management; following hazardous lending and lax collection practices; operating in such a manner as to produce operating losses; operating with hedging activities that pose undue risk; operating with inadequate provisions for funds management; operating with inadequate routine and controls policies; and operating in violation of laws and/or regulations. (This order was terminated by order of the FDIC dated 6-12-92; see ¶ 15,464.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Primary Capital—Increase
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Loan Policy—Written Revision—Minimum Requirements
   [.6] Loans—Charge Offs—Written Policy Required
   [.7] Budget—Written Plan Required—Review
   [.8] Compensation—Directors/Executives—Review
   [.9] Hedging Activity—Written Policy Required—Review
   [.10] Business Plan—Preparation Required
   [.11] Asset/Liability Management—Written Policy Required
   [.12] Bank Operations—Internal Routine and Controls—Policy Required
   [.13] Accounting—Compliance with FASB Required
   [.14] Dividends—Restricted
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   [.15] Violations of Law—Eliminate/Correct
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Compliance Reports—Frequency

In the Matter of

CITIZENS WESTERN BANK
SAN DIEGO, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Citizens Western Bank, San Diego, California ("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 April 30, 1991, 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 any institution-affiliated party as such term is defined in section 3(u) of the 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) following hazardous lending and lax collection practices;
       (c) operating in such a manner as to produce operating losses;
       (d) operating with hedging activities that pose an undue risk to the Bank;
       (e) operating with inadequate provisions for funds management;
       (f) operating with inadequate routine and controls policies; and
       (g) operating in violation of the following laws and/or regulations: Section 350.3(a) of the Rules and Regulations of the Federal Deposit Insurance Corporation, as more fully described on page 6-b of the Report of Examination; and Section 326.5(c) of the Rules and Regulations of the Federal Deposit Insurance Corporation, as more fully described on page 6-b of the Report of Examination.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.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 both a chief executive officer and a chief financial officer with proven ability in managing a Bank of comparable size, 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. 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 Of- {{7-31-91 p.C-1019}}fice ("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. § 1831i.

   [.2] 2. (a) Within 180 days from the effective date of this ORDER, the Bank shall have adjusted primary capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Bank's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Bank shall maintain adjusted primary capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Bank's adjusted Part 325 total assets. The computation of adjusted primary capital and the ratio of adjusted primary capital to adjusted Part 325 total assets shall be determined by using the procedures outlined in the "Analysis of Capital" schedule in the FDIC Report of Examination dated October 31, 1990.
   (b) Any increase in primary capital necessary to meet the requirements of Paragraph 2 of this ORDER may be accomplished by the following:

       (i) the sale of common stock; or
       (ii) the sale of perpetual preferred stock; or
       (iii) the direct contribution of cash by the board of directors, shareholders, and/ or parent holding company; or
       (iv) the collection of assets previously charged off; or
       (v) the reduction of the "Loss" assets specified in Paragraph 3 of this ORDER without loss of 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.
   (c) If all or part of the increase in primary capital required by Paragraph 2 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 Section, 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.
   (d) 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 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 pur- {{7-31-91 p.C-1020}}chaser of the bank's securities who received or was tendered the information contained in the Bank's original offering materials.
   (e) 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).

   [.3] 3. On the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of October 31, 1990, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.
   The requirement of Paragraph 3 of this ORDER is not to be construed as a standard 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 Paragraph 3. As used in Paragraph 3, 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.

   [.4] 4. (a) 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 charged off or classified, in whole or in part, "Loss" and is uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.
   (b) Additionally, during the life 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 whole or part, "Substandard" and is uncollected.
   (c) Paragraph 4(b) shall not apply if the Bank's failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank. Prior to the extending of any additional credit pursuant to this paragraph, either in the form of a renewal, extension, or further advance of funds, such additional credit shall be approved by a majority of the board of directors, or a designated committee thereof, who shall certify, in writing:
       (i) why the failure of the Bank to extend such credit would be detrimental to the best interests of the Bank;
       (ii) that the Bank's position would be improved thereby; and
       (iii) how the Bank's position would be improved. The signed certification shall be made a part of the minutes of the board of directors or designated committee, and a copy of the signed certification shall be retained in the borrower's credit file.

   [.5] 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. 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.
   (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 com-
{{7-31-91 p.C-1021}}
    plete loan 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) 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.

   [.6] 6. Within 60 days from the effective date of this Memorandum, the Bank shall develop, adopt, and implement written nonaccrual and charge off policies, whereby loans and other assets are reviewed periodically to ascertain collectibility. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined in subsequent examinations and/or visitations.

   [.7] 7. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and fully implement a written plan and a comprehensive budget for all categories of income and expense. The plan and budget required by this paragraph shall include formal goals and strategies, consistent with sound banking practices, to improve the Bank's net interest margin, increase interest income, reduce discretionary expenses, and improve and sustain earnings of the Bank. The plan shall include a description of the operating assumptions that form the basis for and adequately support, major projected income and expense components. Thereafter, the Bank shall formulate such a plan and budget by November 30 of each subsequent year.
   (b) The plan and budget required by subparagraph 7(a) of this ORDER, upon completion, shall be submitted to the Regional Director and Superintendent for their review and opportunity for comment.
   (c) Following the end of each calendar quarter, the board of directors shall evaluate the Bank's actual performance in relation to the plan and budget required by subparagraph 7(a) of this ORDER and shall record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors meeting at which such evaluation is undertaken.

   [.8] 8. The Bank shall not increase or provide additional compensation to directors or senior executive officers without the prior written consent of the Regional Director and the Superintendent. In addition, within 60 days of the date of this ORDER, the Bank shall review and study the current director and employee compensation packages and organizational structure. This review shall include the following:

       (a) a critical analysis of each individual's duties and responsibilities, and an appraisal of each individual's performance compared to the present level of compensation;
       (b) a determination of whether the present management team is capable of implementing board directives, operating within the constraints of laws and regulations, and operating the Bank in a prudent manner;
       (c) the development of comprehensive job descriptions; and
       (d) the development of an organizational chart to delineate formal lines of communication and reporting. A copy of the board's findings and a summary of the conclusions shall be provided to the Regional Director and Superintendent upon completion of the study. 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.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall de- {{7-31-91 p.C-1022}}velop, adopt, and implement a written policy that provides for adequate controls over all hedging activity. The policy should address the criticisms contained on page 6-c-2 of the October 31, 1990 Report of Examination; specifically, the policy shall at minimum identify allowable hedging activity, establish allowable exposure limits and appropriate authorization procedures, and provide for a system for periodic monitoring and review. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.10] 10. Within 60 days from the effective date of this Order, the Bank shall prepare and submit to the Regional Director and the Superintendent a written business/ strategic plan covering the overall operation of the Bank. The plan shall be in a form and manner acceptable to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.11] 11. Within 60 days from the effective date of this ORDER, the board of directors shall develop, adopt and implement asset/liability management and liquidity policies. Appropriate parameters for rate sensitivity positions shall be established and procedures implemented to ensure conformance with policies established by the board of directors. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

   [.12] 12. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a policy for the operation of the Bank in such a manner as to provide adequate internal routine and control policies consistent with safe and sound banking practices to correct deficiencies cited on pages 6-c-1, 6-v-2 and 6-c-3 of the October 31, 1990 Report of Examination. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

   [.13] 13. Within 60 days from the effective date of this ORDER, the Bank shall adopt and fully comply with the provisions of FASB 91, including performance of a time study to determine reasonable loan costs. The Bank shall also develop and maintain documentation supporting the determination that fees and costs are immaterial, if applicable.

   [.14] 14. 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 adjusted primary capital 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.

   [.15] 15. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law which are more fully set out on page 6-b of the Report of Examination of the Bank as of October 31, 1990. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.16] 16. 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 sent to the FDIC, Registration and Disclosure Section, 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.

   [.17] 17. 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 OR- {{10-31-93 p.C-1023}}DER 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.
   18. The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank.
   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.
   Pursuant to delegated authority.
   Dated at San Francisco, California, this 14th day of May, 1991.

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