Each depositor insured to at least $250,000 per insured bank



Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders




FDIC Enforcement Decisions and Orders

ED&O Home | Search Form | Text Search | ED&O Help


{{5-31-95 p.C-3950}}
   [11,141] In the Matter of California Security Bank, San Jose, California, Docket No. FDIC-94-186b (3-2-95).

   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 with inadequate allowance for loan and lease losses; operating with insufficient lending and collection practices; operating with inadequate provisions for liquidity and funds management;
{{5-31-95 p.C-3951}}operating in such a manner as to produce operating losses; operating without formal conflicts of interest policy; and operating in violation of applicable laws or regulations.

   [.1] Management—Qualifications—Review
   [.2] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.3] Assets—Adversely Classified—Eliminate/Reduce
   [.4] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.5] Lending and Collection Policy—Minimum Requirements
   [.6] Loan Loss Reserve—Establish/Maintain
   [.7] Profit Plan—Minimum Requirements
   [.8] Strategic Plan—Preparation Required
   [.9] Violations of Law—Eliminate/Correct
   [.10] Loans—Concentrations of Credit—Reduction Plan
   [.11] Asset/Liability Management—Written Policy—Minimum Requirements
   [.12] Bank Secrecy Act—Written Program—Minimum Requirements
   [.13] Conflicts of Interest—Written Policy
   [.14] Dividends—Restricted
   [.15] Shareholders—Disclosure—Cease and Desist Order
In the Matter of

CALIFORNIA SECURITY BANK
SAN JOSE,CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-94-186b

   California Security Bank, San Jose, California ("Bank"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violation of laws 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 January 20, 1995, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violation of laws 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 violation of laws 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, its institution-affiliated parties, as that term is defined in Section 3(u) of the Act, 12 U.S.C. § 1813(u), and its successors and assigns cease and desist from the following unsafe and unsound banking practices and violation of laws and/or regulations:
   (a) operating with inadequate management in terms of lack of depth and experience;
   (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 assets;
   (d) operating with an inadequate loan valuation reserve;
   (e) operating with insufficient lending and collection practices;
{{5-31-95 p.C-3952}}
   (f) operating with inadequate provisions for liquidity and funds management;
   (g) operating in such a manner as to produce losses;
   (h) operating without a formal conflicts of interest policy; and
   (i) operating in violation of Sections 134(b), 1902, and 3359 of the California Financial Code, as more fully described on Pages 8.13–8.14 and 8.18 of the Report of Examination as of July 12, 1994; Sections 103.22, 103.27 and 103.29 of the Department of the Treasury's Financial Recordkeeping and Reporting of Currency and Foreign Transactions Regulation, 31 C.F.R. § 103, as more fully described on Pages 8.14–8.16 of the Report of Examination as of July 12, 1994; Section 337.6 and 353.1 of the FDIC's Rules and Regulations, 12 C.F.R. § 337 and 12 C.F.R. § 353, as more fully described on Page 8.13 of the Report of Examination as of July 12, 1994; and Sections 215.4(a) and 215.4(b) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §¶ 215.4(a) and 215.4(b), made applicable to state nonmember institutions by Section 18(j)(2) of the Act, 12 U.S.C. § 1828(j)(2), as more fully described on Pages 8.17–8.18 of the Report of Examination as of July 12, 1994.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. Within 90 days of the effective date of this Order the Bank shall employ and thereafter 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 financial institution and experience in upgrading low quality assets. 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 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.
   (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 60 days from the effective date of this ORDER, the Bank shall increase Tier 1 capital by no less than $300,000 and shall have Tier 1 capital in such an amount as to equal or exceed seven (7.0%) percent of the Bank's total assets. Thereafter, during the life of this ORDER, the Bank shall maintain Tier 1 capital in such an amount as to equal or exceed seven (7.0%) 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 Superintendent 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 {{5-31-95 p.C-3953}}the board of directors and/or shareholders of the Bank; or
       (iv) any other means acceptable to the Regional Director and the Superintendent; 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, Registration and Disclosure Section, 550 - 17th Street, N.W., 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 noncumulative 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.
   (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 "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(t) and 325.2(v).

[.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" and one-half of the assets classified "Doubtful" as of July 12, 1994, 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 those assets classified "Doubtful" as of July 12, 1994 that have not previously been charged off to not more than $6,000,000.
   (c) Within 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doubtful" as of July 12, 1994 that have not previously been charged off to not more than $4,800,000.
   (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 July 12, 1994 that have not previously been charged off to not more than $3,000,000.
   (e) Within 545 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" and those assets classified "Doub- {{5-31-95 p.C-3954}}tful" as of July 12, 1994 that have not previously been charged off to not more than $2,000,000.
   (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.

[.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" or "Doubtful" 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) Paragraphs 4(a) and 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. Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement a written lending and collection policy to provide effective guidance and control over the Bank's lending function, which policy shall include, at a minimum, revisions to address all items of criticism contained within the July 12, 1994 Report of Examination as well as specific guidelines for placing loans on a nonaccrual basis. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. 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.

   [.6] 6. Within 10 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 within twenty five (25) days after 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 exposure of significant credits, concentrations of credit, and present and prospective economic conditions. A deficiency in the reserve shall be {{5-31-95 p.C-3955}}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.

   [.7] 7. Within 120 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.

   [.8] 8. Within 120 days of the effective date of this ORDER, the Bank shall develop and submit to the Regional Director and Superintendent a written three-year strategic plan. Such plan shall include specific goals for the dollar volume of total loans, total investment securities, and total deposits as of December 31, 1995; December 31, 1996; and December 31, 1997. For each time frame, the plan will also specify the anticipated average maturity and average yield on loans and securities; the average maturity and average cost of deposits; the level of earning assets as a percentage of total assets; and the ratio of net interest income to average earning assets. The plan shall be in a form and manner acceptable to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.

   [.9] 9. Within 45 days of the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law which are more fully set out on Pages 8.13–8.18 of the Report of Examination of the Bank as of July 12, 1994. With respect to violations of law cited in earlier FDIC Reports of Examination which still had not been eliminated and/or corrected as of the Examination of the Bank as of July 12, 1994, the Bank shall continue to take all steps necessary to eliminate and/or correct such violations. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall develop a written plan, approved by its Board of Directors and acceptable to the Regional Director and the Superintendent for systematically reducing the amount of loans or other extensions of credit advanced, directly or indirectly, to or for the benefit of, any borrowers in the "Sacramento" Concentration as listed on Page 3f in the Report of Examination as of July 12, 1994.

   [.11] 11. Within 60 days from the effective date of this ORDER, the Board of Directors shall develop and implement a comprehensive asset/liability management policy, which policy shall be acceptable to the Regional Director and the Superintendent. 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 thirty-five (35.0) percent; and within 360 days from the effective date of this ORDER, be reduced to not more than twenty-five (25.0) percent. The requirements of this Paragraph shall not be construed as standards for future operations, and the Bank's volatile liability dependency ratio shall ultimately be {{5-31-95 p.C-3956}}maintained at a level consistent with prudent banking practices;
       (ii) establishing a range for shortterm 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.

   [.12] 12. Within 60 days from the effective date of this ORDER, the Bank shall develop or revise, adopt and implement a written Bank Secrecy Act ("BSA") Program to include the minimum requirements as set forth in both Part 326.8 of the FDIC's Rules and Regulations and the FDIC's Statement of Policy dated June 30, 1987, entitled "Guidelines for Monitoring Bank Secrecy Act Compliance." Adoption of the written BSA Program shall be noted in the minutes of the Board.
   The Program shall specifically include the following:
       (a) A system of internal controls, which shall be designed to identify reportable currency transactions, ensure that all required reports are completed accurately and properly filed, ensure that customer exemptions are properly granted and recorded, provide for adequate supervision of employees involved in activities covered by 31 C.F.R. Part 103 Financial Recordkeeping regulations, and establish dual controls and provide for separation of duties.
       (b) Independent testing for compliance with the BSA and 31 C.F.R. Part 103. The independent testing should be conducted on an annual basis by qualified, trained, and experienced third parties, such as independent public accountants or specialists in this subject matter, who are not, in any manner, affiliated with the Bank. The testing, at a minimum, should include the following:
         (i) a test of the Bank's internal procedures for monitoring BSA;
         (ii) a sampling of large currency transactions followed by a review of the currency transaction report filings;
         (iii) a test of the validity and reasonableness of the customer exemptions granted by the Bank;
         (iv) a test of the Bank's recordkeeping system for compliance with the BSA; and
         (v) documentation of the scope of the testing procedures performed and the findings of the testing. Written reports should be prepared which document the testing results and provide recommendations for improvement and shall be presented to the Bank's Board of Directors and noted in official Board minutes.
       (c) Designation of an individual(s) responsible for coordinating and monitoring compliance with the BSA. The Bank shall designate a senior bank official to be responsible for overall BSA compliance. This individual will be provided with the necessary training authority and responsibility to effectively administer the Bank's BSA program.
       (d) Training for appropriate personnel. The Bank's training program shall provide training of tellers and other personnel who handle currency transactions. In addition, an overview of the BSA requirements should be given to new employees and efforts made to keep executives informed of changes and new developments in BSA regulations.

   [.13] 13. Within 60 days from the effective date of this ORDER, the Bank shall develop or revise, adopt and implement a comprehensive conflicts of interest policy which addresses, at a minimum, the requirements of Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. § 371c and Regulation O of the Board of Governors of the Federal Reserve System.

   [.14] 14. The Bank shall not pay cash dividends without the prior written consent of the Regional Director and the Superintendent.

   [.15] 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 {{1-31-97 p.C-3957}}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, 550 - 17th Street, N.W., 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.

   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.
   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, 1995.
   Pursuant to delegated authority.

ED&O Home | Search Form | Text Search | ED&O Help

Last Updated 6/6/2003 legal@fdic.gov