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FDIC Enforcement Decisions and Orders

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   [10,940] In the Matter of BestBank, Thornton, Colorado, Docket No. FDIC-93-78b (1-31-94).

   Bank to cease and desist from such unsafe or unsound practices as operating with management whose policies are detrimental to the Bank; operating with inadequate supervision by the board of directors; engaging in hazardous practices with regard to the acquisition of assets and liabilities held by the Bank; operating {{12-31-95 p.C-3573}}without an adequate business plan and budget; acquiring and installing ATMs without adequate planning and in violation of federal regulations; operating with inadequate allowance for loan and lease losses; operating with an inadequate written loan policy and in contravention of established policies; failing to submit Reports of Condition and Income in accordance with instructions; operating with inadequate liquidity; operating with inadequate investment and liquidity policy; operating with heavy reliance on volatile deposits; operating in violation of applicable laws or regulations; operating without proper internal routine and controls; and paying personal expenses to or on behalf of bank personnel. (This order was terminated by order of the FDIC dated 10-4-95. See ¶16,042.)

   [.1] Dividends—Restricted
   [.2] Assets—Adversely Classified—Eliminate/Reduce
   [.3] Allowance for Loan and Lease Losses—Establish/Maintain
   [.4] Management—Qualifications—Review
   [.5] Board of Directors—Election—Outside Directors Added
   [.6] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.7] Lending and Collection Policy—Minimum Requirements
   [.8] Violations of Law—Eliminate/Correct
   [.9] Funds Management—Written Policy Required
   [.10] Brokered Deposits—Reduction Plan Required
   [.11] Bank Operations—Internal Routine and Controls—Correct Deficiencies
   [.12] Budget and Business Plan—Preparation Required
   [.13] Bank Operations—Employee Expenses—Audit
   [.14] Shareholders—Disclosure—Cease and Desist Order

In the Matter of

BESTBANK
THORNTON,COLORADO
(Insured State Nonmember Bank)
ORDER TO CEASE
AND DESIST

FDIC-93-78b

   The Federal Deposit Insurance Corporation ("FDIC"), on April 28, 1993, issued to BestBank, Thornton, Colorado ("Bank"), a NOTICE OF CHARGES AND OF HEARING ("NOTICE") under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b). The NOTICE charged the Bank with having engaged in unsafe or unsound banking practices. The Bank, through its board of directors, and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") dated January 31, 1994, whereby solely for the purpose of this proceeding and without admitting or denying the allegations in the NOTICE, 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 violated laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS ORDERED, that the Bank and institution-affiliated parties of the Bank cease and desist from the following unsafe or unsound banking practices and violations of laws and/or regulations:
   (a) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   (b) Operating the Bank without adequate supervision and direction by the board of directors over the management of the Bank;
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   (c) Engaging in hazardous practices with regard to the acquisition of assets and liabilities held by the Bank;
   (d) Operating the Bank without an adequate written business plan and budget;
   (e) Acquiring and installing automated teller machines without adequate preplanning and analysis and in violation of Federal laws and regulations;
   (f) Failing to provide an adequate allowance for loan and lease losses;
   (g) Operating the Bank without adequate written loan policies and procedures;
   (h) Operating the Bank in contravention of written loan policies and procedures;
   (i) Failing to accurately reflect the condition of the Bank in published statements and Consolidated Reports of Condition and Income;
   (j) Operating the Bank without adequate liquidity or proper regard for funds management;
   (k) Operating the Bank without an adequate investment policy which addresses funding strategies and liquidity objectives;
   (l) Operating the Bank with a heavy reliance on short-term potentially volatile deposits as a source for funding longer-term investments;
   (m) Operating the Bank in violation of applicable Federal and State laws and regulations as more fully set forth on pages 6-b through 6-b-7 of the FDIC Report of Examination of the Bank as of October 2, 1992;
   (n) Operating the Bank without adequate policies and procedures regarding internal routine and controls; and
   (o) Paying personal expenses to or on behalf of Bank personnel.
   IT IS FURTHER ORDERED, that the Bank take affirmative action as follows:

   [.1] 1. While this ORDER is in effect, the Bank shall neither declare nor pay, directly or indirectly, any cash dividend to shareholders without the prior written consent of the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") and the State Bank Commissioner for the State of Colorado ("Commissioner").

   [.2] 2. While this ORDER is in effect, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as determined at any examination conducted by the FDIC or the State at such time as the report of examination is received by the Bank.

       [.3] 3. (a) Within 10 days from the effective date of this ORDER, the Bank shall increase its allowance for loan and lease losses ("allowance") to an adequate level.
       (b) Thereafter, the Bank shall maintain its allowance at an adequate level in accordance with the prevailing requirements of the Instructions for the Consolidated Reports of Condition and Income. Toward this end, within 60 days of this ORDER, the Bank's board of directors shall establish a comprehensive policy for determining the adequacy of the Bank's allowance. The policy shall provide for a review of the allowance at least once each calendar quarter. 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 exposure on significant credits, concentrations of credit, and present and prospective economic conditions. The adequacy of the allowance in relation to the loss potential in the loan portfolio will be reviewed by the board of directors, and adjustments to the allowance will be made accordingly. Details of these reviews will be incorporated into the minutes of the board of directors, including the methodology used to determine the adjustments.
       (c) Within 30 days after the effective date of this ORDER, the Bank shall review Consolidated Reports of Condition and Income filed with the FDIC on or after December 31, 1991, and amend said reports if necessary to properly reflect the financial condition of the Bank as of the date of each such report. In particular, such reports shall contain an adequate allowance for loan and lease losses. Reports filed after the effective date of this ORDER shall also accurately reflect the financial condition of the Bank as of the reporting date.
       (d) For the purposes of this ORDER the term "allowance for loan and lease losses" shall have the meaning ascribed to it in Part 325 of the FDIC's Rules and Regulations, respectively subsections 325.2(a), 12 C.F.R. § 325.2(a).

   [.4] 4. The Bank shall have and retain qualified management. Each member of management shall possess qualifications and experience commensurate with his or her duties {{3-31-94 p.C-3575}}and responsibilities at the Bank. Such management shall include a qualified chief executive officer and a qualified chief lending officer. The qualifications of management personnel shall be evaluated on their ability to:
         (i) comply with the requirements of the 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.
       During the life of this ORDER, the Bank shall notify the Regional Director and the Commissioner in writing of any changes in management. The notification must include the name(s) and background(s) of any replacement personnel and must be provided prior to the individual(s) assuming the new position(s).

    [.5] 5. (a) Within 60 days after the date of this ORDER, the Bank shall prepare a plan for submission to the shareholders at their next meeting to reorganize the board of directors either by increasing the number of directors or by appointing new directors so that for so long as this ORDER is outstanding at least 50 percent of the members of the board shall be independent, outside directors as defined herein.
       (b) For the purposes of this ORDER, an "outside director" shall be an individual:
         (i) Who shall not be employed by the Bank or its affiliates other than as a director of the Bank or an affiliate;
         (ii) Who shall not own or control more than 5 percent of the voting stock of the Bank or its holding company;
         (iii) Who shall not be indebted to the Bank or any of its affiliates in an amount greater than 5 percent of the Bank's Tier 1 capital;
         (iv) Who shall not be related to any director or principal shareholder of the Bank or to any director or principal shareholder of any affiliate of the Bank; and
         (v) Who shall be a resident of, or engage in business in, the Bank's trade area.

   [.6] 6. Within 60 days after the effective date of this ORDER, the board of directors shall establish a committee of the board of directors charged with the responsibility of ensuring that the Bank complies with the provisions of this ORDER. At least twothirds of the members of such committee shall be independent, "outside directors" as defined in this ORDER. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.

   [.7] 7. Within 60 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies and procedures 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 Commissioner, as determined at subsequent examinations, and shall include, at a minimum, the following:

       (a) Standards for extending credit to Bank directors, officers, shareholders and their related interests which take into account applicable Federal and State laws governing such extensions of credit;
       (b) A provision that deviations from the written lending policies and procedures require prior approval of the board of directors; and
       (c) Standards setting forth appropriate and comprehensive guidelines for the types of credit extended by the Bank, including both loans and credit cards accounts.

   [.8] 8. After the effective date of this ORDER, the Bank, consistent with sound banking practices, shall eliminate and/or correct all violations of laws and/or regulations existing in the Bank as of October 2, 1992, as more fully set forth on pages 6-b through 6-b-7 of the October 2, 1992 FDIC Report of Examination. In addition, the Bank shall ensure its future compliance with all applicable laws and regulations.

   [.9] 9. Within 60 days after the effective date of this ORDER, the Bank shall amend {{3-31-94 p.C-3576}}its written funds management policy. The Bank shall immediately initiate the measures detailed in the policy to the extent such measures have not been initiated. The funds management policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Commissioner, as determined at subsequent examinations and shall include, at a minimum, the following:

       (a) An asset/liability management strategy to achieve an acceptable rate sensitivity balance between investments and funding sources;
       (b) A plan to decrease the reliance of the Bank on short-term, potentially volatile liabilities for funding longer-term assets; and
       (c) Procedures which will enable the board of directors and management to monitor the Bank's liquidity position and maintain liquidity at an adequate level.

   [.10] 10. Within 30 days of the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner a written plan for reducing its reliance on brokered deposits. The plan should contain details as to the current composition of brokered deposits by maturity and explain the means by which such deposits will be paid. The plan shall be in a form and manner acceptable to the Regional Director and the Commissioner. The Bank must provide quarterly written progress reports to the Regional Director and the Commissioner detailing the level, source, and use of brokered deposits with specific reference to progress under the Bank's plan. For purposes of this ORDER, the term "brokered deposits" shall have the meaning ascribed to it in section 337.6 of the FDIC's Rules and Regulations, 12 C.F.R. 337.6.

   [.11] 11. Within 60 days after the effective date of this ORDER, the Bank shall eliminate and/or correct all internal routine and control deficiencies as more fully set forth on pages 6-c through 6-c-3 of the October 2, 1992 FDIC Report of Examination. In addition, the Bank shall ensure that adequate policies and procedures are in place in the future with regard to internal routine and controls as relates to the Bank's operations.

   [.12] 12. Within 60 days after the effective date of this ORDER, the Bank shall prepare and present to the Regional Director and the Commissioner a Business Plan and Budget setting forth asset, loan, deposit, earnings, and capital projections for the Bank for the three-year period beginning January 1, 1994. The Business Plan and Budget shall identify fully the types of business and investment programs to be engaged in by the Bank as well as funding sources and shall contain provisions to control the quality of the Bank's assets, ensure that the ratio of adjusted Tier 1 capital to adjusted total assets shall not be less than 6.0 percent during the life of the ORDER, and shall be updated annually to reflect any deviations or changes in the plan. After the Regional Director and the Commissioner respond to the Business Plan and Budget, the board of directors of the Bank shall adopt the plan, including any modifications or amendments requested by the Regional Director and the Commissioner.

    [.13] 13. (a) Within 60 days of the effective date of this ORDER, the Bank shall reduce to writing a policy addressing expenses incurred by Bank personnel. Such policy shall, at a minimum:
         (i) require periodic review by the Bank's board of directors, including a cost/benefit analysis, of the justification of expenses incurred and paid to or on behalf of Bank personnel, with the recordation of such review enumerated in the minutes thereof;
         (ii) prescribe provisions delineating the appropriate records to be maintained in conjunction with such expenses, including dated logs indicating the nature and purpose for such expenses; and
         (iii) prohibit the use of Bank funds for personal expenses.
       (b) Within 60 days of the effective date of this ORDER, the Bank's board of directors shall engage a qualified, independent auditing firm, acceptable to the Regional Director and the Commissioner, to perform an opinion audit of all expenses paid by the Bank to or on behalf of Edward P. Mattar III as more fully set forth on pages 6-b through 6-b-7 of the October 2, 1992 FDIC Report of Examination. With regard to payments determined by the independent auditing firm not to be directly related to bank business, the Bank shall seek reimbursement from Mr. Mattar. Furthermore, the Bank shall not, directly or indirectly, make additional compensation (salary and/or bonus), dividend {{10-31-94 p.C-3577}}payments, remuneration, and/or payments of any kind to Mr. Mattar, to Executive Management Systems, Inc., to any related interest of Mr. Mattar as "related interest" is defined in Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215, or to any affiliate of the Bank as "affiliate" is defined in Section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, in relation to or in connection with his reimbursement to the Bank.
       (c) The independent auditing firm shall provide a written report to the board of directors of the Bank, with a copy sent to the Regional Director and the Commissioner, of its findings and in support of its opinion.

   [.14] 14. After the effective date of the ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER, (i) in conjunction with the Bank's next shareholder communication, and also (ii) 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 Unit, Washington, D.C. 20429, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   15. Within 30 days after the end of the first calendar quarter following the effective date of this ORDER, and within 30 days after the end of each successive calendar quarter, 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 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 additional reports.
   16. The effective date of this ORDER shall be 10 days after the date of its issuance. This ORDER shall be binding upon the Bank and all institution-affiliated parties of the Bank.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated at Dallas, Texas, this 31st day of January, 1994.
   Pursuant to delegated authority.

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