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FDIC Enforcement Decisions and Orders

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   [10,462] In the Matter of Commerce Security Bank, Sacramento, California, Docket No. FDIC-92-59b (3-2-92).

   Bank to cease and desist from such unsafe or unsound practices as operating with management deficiencies; operating with inadequate capital and reserves; operating with a large volume of poor quality loans; operating with an inadequate loan valuation reserve; following unsatisfactory lending and collection practices; operating with inadequate liquidity; operating with inadequate routine and controls policies; operating in such a manner as to produce inadequate earnings; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 11-8-94; see ¶ 15,932.)

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Total Assets—Limit on Increases
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.6] Loan Policy—Written Revision Required
   [.7] Loans—Concentrations of Credit—Reduction Required
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   [.8] Loan Loss Reserve—Establish/Maintain
   [.9] Profit Plan—Minimum Requirements
   [.10] Audit—Internal—Written Policy Required
   [.11] Strategic Plan—Preparation Required
   [.12] Violations of Law—Eliminate/Correct
   [.13] Funds Management—Written Policy Required
   [.14] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.15] Dividends—Restricted
   [.16] Reports of Condition and Income—Accuracy Required
   [.17] Compensation—Executives—Written Agreement Required
   [.18] Brokered Deposits—Report to FDIC Required
   [.19] Shareholders—Disclosure—Cease and Desist Order
   [.20] Real Estate Activities—Compliance with State Law Required
   [.21] Compliance Reports—Frequency
   [.22] Institution-Affiliated Parties—Disclosure—Cease and Desist Order

In the Matter of

COMMERCE SECURITY BANK
SACRAMENTO, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Commerce Security Bank, Sacramento, 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 February 5, 1992, 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 management deficiencies;
       (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) following unsatisfactory lending and collection practices;
       (f) operating with inadequate provisions for liquidity and funds management;
       (g) operating with inadequate routine and controls policies;
       (h) operating in such a manner as to produce inadequate core earnings; and
       (i) operating in violation of the following laws, rules, and regulations:
         (i) Section 325.3 of the FDIC Rules and Regulations, and as more fully de- {{5-31-92 p.C-2011}}scribed on page 6-a-1 of the Report of Examination as of August 19, 1991; and
         (ii) Section 84 of the United States Code, 12 U.S.C. § 84, and its implementing regulations as set forth in 12 C.F.R. Part 32, and as more fully described on page 6-a of the Report of Examination as of August 19, 1991; and
         (iii) Section 1230 of the California Financial Code, Cal. Fin. Code § 1230 (West 1989), and as more fully described on page 6-a-1 of the Report of Examination as of August 19, 1991.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. During the life of this ORDER, 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 and a chief financial officer, both 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.
   (b) Within 120 days from the effective date of this ORDER, the Bank should also include a senior loan officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Bank's loans as well as experience in upgrading a low quality loan portfolio.
   (c) Each member of management shall be provided appropriate written authority from the Bank's board of directors to implement the provisions of this ORDER.
   (d) 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.
   (e) The Bank shall cause its articles of incorporation or bylaws or other governing corporate instrument to be amended to require, within 120 days from the effective date of this ORDER, the addition of two (2) outside members to its board of directors, both of whom have qualifications which are unrelated to the real estate industry.
   (f) 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 for the State of California ("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.
   (g) 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) By June 30, 1992, the Bank shall increase adjusted Tier 1 capital by no less than $3,300,000 and shall maintain Tier 1 capital in such an amount as to equal or exceed five (5.0) percent of the Bank's total assets, but in no event shall adjusted Tier 1 capital be below $8,250,000.
   (b) By September 30, 1992, the Bank shall increase adjusted Tier 1 capital by no less than an additional $1,750,000 and shall maintain Tier 1 capital in such an amount as to equal or exceed six (6.0) percent of the Bank's total assets, but in no event shall adjusted Tier 1 capital be below $10,000,000.
   (c) By December 31, 1992, the Bank shall increase adjusted Tier 1 capital by no less than an additional $1,000,000 and shall maintain thereafter, during the life of this ORDER, Tier 1 capital in such an amount as to equal or exceed six and one-half (6.5) percent of the Bank's total assets, but in no event shall adjusted Tier 1 capital be below $11,000,000.

       (i) The level of Tier 1 capital to be
    {{5-31-92 p.C-2012}}maintained during the life of this ORDER pursuant to Subparagraph 2(c) shall be in addition to a fully funded loan loss reserve, the adequacy of which shall be satisfactory to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.
   (d) Any increase in Tier 1 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 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 Bank's earnings; or
       (vi) the reduction of the "Loss" assets specified in Paragraph 3 of this ORDER without loss or liability to the Bank; or
       (vii) any other means acceptable to the Regional Director and the Superintendent; or
       (viii) any combination of the above means.
   Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 2 of this ORDER may not be accomplished through a deduction from the Bank's loan loss reserves.
   (e) If all or part of the increase in Tier 1 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 Tier 1 capital is provided by the sale of non-cumulative perpetual 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.
   (f) 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.
   (g) For the purposes of this ORDER, the terms "Tier 1 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(m) and 325.2(n), as amended at 56 Fed. Reg. 10154, effective April 10, 1991.

   [.3] 3. By June 30, 1992, the total assets of the Bank shall not be in excess of $165,000,000 unless the Bank is in full compliance with Paragraph 2 of this ORDER and has substantially complied with all remaining requirements of this ORDER as determined by the Regional Director and the Superintendent at subsequent examinations and/or visitations.

   [.4] 4. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as
{{5-31-92 p.C-2013}}of August 19, 1991, 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.
   (b) Within 90 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and related contingencies as of August 19, 1991 that have not previously been charged off to not more than $10,250,000.
   (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and related contingencies as of August 19, 1991 that have not previously been charged off to not more than $9,200,000.
   (d) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and related contingencies as of August 19, 1991 that have not previously been charged off to not more than $7,500,000.
   (e) Within 480 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and related contingencies as of August 19, 1991 that have not previously been charged off to not more than $5,000,000.
   (f) The requirements of subparagraphs 3(a), 3(b), 3(c), 3(d), and 3(e) 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), 3(e) and 3(f), 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.

   [.5] 5. 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 "Doubtful" or "Substandard" and is uncollected unless the board of directors has signed a detailed written statement giving reasons why failure to extend such credit would be detrimental to the bests interests of the Bank. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.

   [.6] 6. 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. 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.

   [.7] 7. (a) By September 30, 1992, the Bank shall reduce individual concentrations to not more than two hundred twenty five percent (225.0%) of Tier 1 capital;
   (b) By December 31, 1992, the Bank shall reduce individual concentrations of credit to not more than one hundred fifty percent (150.0%) of Tier 1 capital; and
   (c) By June 30, 1993, the Bank shall reduce individual concentrations of credit to not more than one hundred percent (100.0%) of Tier 1 capital.

   [.8] 8. Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for loan losses.
   Additionally, within 30 days from the effective date of this ORDER, the board of directors shall develop or revise, adopt and implement a comprehensive policy for determining the adequacy of the reserve for loan losses. For the purpose of this determination, the adequacy of the reserve shall be determined after the charge-off of all loans or other items classified "Loss." The policy shall provide for a review of the reserve at least once each calendar quarter. Said review should be completed prior to the end of each quarter, in order that the findings of the board of directors with respect to the loan loss reserve may be properly reported in the quarterly Reports of Condition and Income. The review should focus on the results of the Bank's internal loan review, loan loss experience, trends of delinquent and non-accrual loans, an estimate of potential loss
{{5-31-92 p.C-2014}}exposure of significant credits, concentrations of credit, and present and prospective economic conditions. A deficiency in the reserve shall be remedied in the calendar quarter it is discovered, prior to submitting the Report of Condition, by a charge to current operating earnings. The minutes of the board of directors meeting at which such review is undertaken shall indicate the results of the review. Upon completion of the review, the Bank shall increase and maintain its loss reserve consistent with the loan loss reserve policy established. Such policy and its implementation shall be satisfactory to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

   [.9] 9. 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.

   [.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall formulate internal audit standards and policy in written form. This internal audit standards and policy shall be forwarded to the Regional Director and to the Superintendent for review and comment and shall insure, at a minimum, that the internal auditor shall report directly to the board of directors.

   [.11] 11. By September 30, 1992, the Bank shall submit a revised mid-range strategic plan, covering the period 1993-1995, that will reflect changes in the Bank's balance sheet and ongoing operations necessitated by the requirements of this document. In addition, such plan shall focus on restricting future growth to a level consistent with prudent banking standards and fully consistent with Paragraph 3 of this ORDER. The plan and its implementation shall be in a form and manner acceptable to the Regional Director and the Superintendent.

   [.12] 12. By no later than December 31, 1992, and during the life of this ORDER, the Bank shall eliminate and/or correct all violations of law which are more fully set out on pages 6-a and 6-a-1 of the Report of Examination of the Bank as of August 19, 1991. For the purposes of determining correction of the violations scheduled relative to capital standards embodied in Part 325 of the FDIC's Rules and Regulations, the Bank's compliance with the provisions outlined in Paragraph 2 of this ORDER will constitute correction of the stated violations. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.13] 13. Within 60 days from the effective date of this ORDER, the Bank shall develop or revise, adopt, and implement a written liquidity and funds management policy. 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.

   [.14] 14. 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. Such policy shall, at a minimum, eliminate and/or correct all internal routine and control deficiencies as more fully set out on pages 6-b and 6-b-1 of the Report of Examination of the Bank as of August 19, 1991 and shall guarantee that the Bank will take all necessary steps to ensure future compliance with all applicable laws and regulations. Such policy and its implementation shall be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.

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

    {{5-31-92 p.C-2015}}(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 Tier 1 capital to total assets of the Bank will be not less than six and one-half (6.5) 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.

   [.16] 16. 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 State Banking Department or FDIC examination of the Bank during that reporting period.

   [.17] 17. Within 30 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement a written executive compensation (bonus) agreement. The agreement shall incorporate qualitative as well as profitability performance standards and shall be in a form and manner acceptable to the Regional Director and Superintendent.
   [.18] 18. During the life of this ORDER, the Bank shall give written notice to the Regional Director and the Superintendent at such time as the Bank intends to make use of brokered deposits. The notification should indicate how the brokered deposits are to be utilized with specific reference to credit quality of investments/loans and the effect on the Bank's funds position and asset/liability matching. The Regional Director and the Superintendent shall have the right to reject the Bank's plans for utilizing brokered deposits. For purposes of this ORDER, brokered deposits are defined as described in section 337.6(a)(1) of the FDIC Rules and Regulations to include any deposits funded by third party agents or nominees for depositors, including deposits managed by a trustee or custodian when each individual beneficial interest is entitled to or asserts a right to federal deposit insurance.

   [.19] 19. 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 (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] 20. During the life of this ORDER, the Bank shall not engage in any additional real estate activities which would require an application to be filed with the Superintendent pursuant to section 751.3 of the California Financial Code, Cal. Fin. Code § 751.3 (West 1989).

   [.21] 21. 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.

   [.22] 22. Following the effective date of this ORDER, the Bank shall send to or otherwise furnish a description of this ORDER to all institution-affiliated parties as such term is defined in Section 3(u) of the Act, 12 U.S.C. 1813(u). The description shall fully describe the ORDER in all material respects.
   The provisions of this ORDER shall be binding upon 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),
{{5-31-92 p.C-2016}}to include, 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.
   Dated at San Francisco, California, this 2nd day of March, 1992.
   Pursuant to delegated authority.

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