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FDIC Enforcement Decisions and Orders

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   [10,635] In the Matter of Citizens Security Bank, Agana, Guam, Docket No. FDIC-92-277b (8-27-92).

   Bank to cease and desist from such unsafe or unsound practices as operating with inadequate management; operating with inadequate capital; operating with an excessive level of poor quality assets; operating without adequate reserve for loan losses; following hazardous lending and lax collection practices; operating with inadequate liquidity; operating without proper internal routine and controls; operating in such a manner as to produce low earnings; and operating in violation of applicable laws or regulations. (This order was terminated by order of the FDIC dated 12-21-93; see ¶ 15,777.)

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   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Lending and Collection Policy—Minimum Requirements
   [.5] Loan Loss Reserve—Establish/Maintain
   [.6] Violations of Law—Eliminate/Correct
   [.7] Asset/Liability Management—Written Policy—Minimum Requirements
   [.8] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.9] Assets—Limitation on Increase
   [.10] Compliance Reports—Frequency

In the Matter of

CITIZENS SECURITY BANK
AGANA, GUAM
(Insured State Nonmember Bank)
ORDER
TO CEASE AND DESIST

FDIC-92-277b
   Citizens Security Bank, Agana, Guam ("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 25, 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 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) following hazardous lending and lax 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 low earnings; and
   (i) operating in violation of section 323 of the FDIC's Rules and Regulations, 12 C.F.R. § 323, as more fully described on pages 6-a and 6-a-1 of the Report of Examination as of April 21, 1992; and section 6313 of the Government Code of Guam, as more fully described on page 6-a-1 of the Report of Examination as of April 21, 1992.
   IT IS FURTHER ORDERED that the Bank take affirmative action as follows:

   [.1] 1. Within 90 days from the effective date of this ORDER, the Bank shall have and retain qualified management.
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   (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 in 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 Commissioner of Banking for the State of Guam ("Commissioner") 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) During the life of this ORDER, the Bank shall have Tier 1 capital in such an amount as to equal or exceed ten (10.0) percent of the Bank's total assets.
   (b) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Subparagraph 2(a) shall be in addition to a fully funded loan loss reserve, the adequacy of which shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.
   (c) 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) any other means acceptable to the Regional Director and the Commissioner; or
       (v) 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.
   (d) 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, Registra- {{10-31-92 p.C-2685}}tion 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 Commissioner 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 who has subscribed for or purchased Bank securities in an offering commenced by the Bank during the life of this ORDER, a written notice of any planned or existing development or other changes which existed prior to the consummation of the offering and 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 "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. (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 of April 21, 1992, 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 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of April 21, 1992 that have not previously been charged off to not more than $2,500,000.
   (c) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of April 21, 1992 that have not previously been charged off to not more than $2,000,000.
   (d) The requirements of subparagraphs 3(a), 3(b), and 3(c) 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), and 3(d) 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) Within 90 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 Commissioner 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 in the Loan Review section which (A) expand the definitions of loan grades, including criteria for each credit factor, and (B) determine periodic time frames for credit review;
       (ii) provisions in the Real Estate Appraisal section which (A) provide a list of appraisers approved by the board of {{10-31-92 p.C-2686}}directors, (B) require loan officers to analyze, review and document the quality of appraisals, and (C) require loan to value ratios to based on revised appraised values, where applicable;
       (iii) provisions in the Customer Files section which require accountability for reviews, periodic time frames, documentation, and disposition of exceptions;
       (iv) provisions in the Overdraft section which (A) place limits and parameters on the amount of unsecured overdraft credit and maturities, (B) address the method of billing and collection of interest and fees to be utilized on overdrafts, (C) limit the type of borrowers who will be granted unsecured overdraft credit;
       (v) provisions governing guidelines for adequate cash flow analysis, including debt-to-income ratios, verification of income, and identification of repayment sources;
       (vi) provisions addressing the format and content of loan proposal write-ups which should include sources of repayment, cash flow analysis, and strengths and weaknesses;
       (vii) provisions which (A) prohibit concentrations of credit in excess of 25 percent of the Bank's Tier 1 capital to any borrower and that borrower's related interest without procedures in place to ensure the creditworthiness of the borrower; and (B) prohibit extensions of credit to a single industry in excess of 100 percent of the Bank's Tier 1 capital without procedures in place to limit the amount of credit to prudent levels; and
       (viii) the board of directors shall adopt procedures whereby officer compliance with the revised loan 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.

   [.5] 5. Within 30 days from the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for loan losses.
   In addition, within 90 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 in such time so 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 nonaccrual loans, an estimate of potential loss 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.

   [.6] 6. Within 60 days from the effective date of this ORDER, the Bank shall to the extent possible 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 April 21, 1992. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.7] 7. Within 90 days from the effective date of this ORDER, the board of directors shall revise and implement an asset/liability management policy which (a) establishes a range for the Bank's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination, and which ratio shall be reduced to a prudent level; and (b) improves interest rate sensitivity.

   [.8] 8. Within 90 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 and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.

   [.9] 9. During the life of this ORDER, the Bank shall not increase its average assets {{11-30-92 p.C-2687}}during any calendar quarter by more than three (3.0) percent over its average assets for the immediately preceding quarter without receiving the prior written approval of the Regional Director and the Commissioner. For the purposes of this paragraph 9, the Bank's average assets during any calendar quarter shall equal the daily average of the Bank's assets from the beginning of the quarter to the date on which compliance with this paragraph is being determined.

   [.10] 10. 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 Commissioner 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. In addition, by the tenth day of each month, the Bank shall furnish a balance sheet for the previous month-end to the Regional Director and the Commissioner. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner have released the Bank in writing from making further reports.
   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.
   Dated at San Francisco, California, this 27th day of August, 1992.
   Pursuant to delegated authority.

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