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   [11,554] In the Matter of Pan American Bank, Chicago, Illinois, Docket No. 98-53b (9-22-98)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 11-17-99; see ¶16,245.)
   [.1] Capital—Increase Required
   [.2] Management—Qualifications Specified
   [.3] Assets—Adversely Classified Assets—Reduction Required
   [.4] Loan Loss Reserve—Establishment of or Increase Required
   [.5] Profit Plan—Preparation of Plan Required
   [.6] Year 2000 Plan—Preparation of Required
   [.7] Shareholders—Disclosure of Cease and Desist Order Required
   [.8] Board of Directors—Committee to Review Compliance with Cease and Desist Order Required

In the Matter of
PAN AMERICAN BANK
CHICAGO,ILLINOIS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-98-53b

   Pan American Bank, Chicago, Illinois, ("Bank"), having been advised of its right to a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices alleged to have been committed by the Bank, and of its right to a hearing on the charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), 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"), and the Commissioner of the Office of Banks and Real Estate ("Commissioner"), dated September 17, 1998 whereby, solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC and Commissioner considered the matter and determined that they had reason to believe that the Bank had engaged in unsafe or unsound banking practices. The FDIC and Commissioner, therefore, accepted the CONSENT AGREEMENT and the FDIC issued the following:
   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 or unsound banking practices:
   A. Operating with an inadequate level of capital protection for the risk profile of the bank.
   B. Operating with excessive overhead costs, and inadequate net interest margins.
   C. Operating without an effective profit plan.
   D. Operating with an excessive level of adversely classified loans.
   E. Operating with an inadequate allowance for loans and lease losses for the volume, kind, and quality of loans held.

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   F. Operating with a board of directors that has failed to address management changes in a timely manner.
   G. Failing to take appropriate measures to ensure that the Bank's electronic information systems and other automated systems that are used by the Bank, or upon which the Bank depends for the conduct of its business ("Bank Information Systems") are able to perform correctly all automated processing operations, including interactions and interdependencies with other automated systems, involving dates later than December 31, 1999 ("Year 2000 compliant")
   H. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. (a) Within 90 days from the effective date of this ORDER, the Bank shall increase its Tier 1 capital by not less than $1,800,000.
   (b) Within 30 days of the date of required compliance with paragraph 1(a) of this ORDER, and within 30 days from the last day of each calendar quarter thereafter, the Bank shall determine from its Report of Condition and Income its level of Tier 1 capital as a percentage of its total assets ("capital ratio") for that calendar quarter. If the capital ratio is less than 8.0 percent, the Bank shall, within 60 days of the date of the required determination, increase its capital ratio to not less than 8.0 percent calculated as of the end of that preceding quarterly period. For purposes of this ORDER, Tier 1 capital and total assets shall be calculated in accordance with Part 325 of the FDIC Rules and Regulations ("Part 325"), 12 C.F.R. Part 325.
   (c) Any such increase in Tier 1 capital may be accomplished by the following:

       (i) The sale of common stock and noncumulative perpetual preferred stock constituting Tier 1 capital under Part 325; or
       (ii) The elimination of all or part of the assets classified "Loss" as of April 6, 1998, without loss or liability to the Bank, provided any such collection on a partially charged-off asset shall first be applied to that portion of the asset which was not charged off pursuant to this ORDER;
       (iii) The collection in cash of assets previously charged off; or
       (iv) The direct contribution of cash by the directors and/or the shareholders of the Bank or its holding company; or
       (v) Any other means acceptable to the Regional Director of the Chicago Regional of the FDIC ("Regional Director") and Commissioner; or
       (vi) Any combination of the above means.
   (d) If all or part of the increase in capital required by this paragraph is to be accomplished by the sale of new securities, the board of directors of the Bank shall adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held by or controlled by them in favor of said plan. Should the implementation of the plan involve public distribution of the Bank securities, including a distribution limited only to the Bank's existing shareholders, the Bank shall prepare detailed 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 20 days prior to the dissemination of any such materials to be used in a public distribution, the materials used in the sale of the securities shall be submitted to the FDIC at Washington, D.C., for its review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (e) In complying with the provisions of paragraph 1(d) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph shall be furnished within 10 calendar days of the date any material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of the Bank's original offering materials.
   (f) The capital ratio analysis required by this paragraph shall not negate the responsibility of the Bank and its board of directors for maintaining throughout the year an {{11-30-98 p.C-4615}}adequate level of capital protection for the kind, quality and degree of market depreciation of assets held by the Bank.

   [.2] 2. (a) During the life of this ORDER, the Bank shall have and thereafter retain qualified management. Each member of management shall have the qualifications and experience commensurate with his or her duties and responsibilities at the Bank. 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.
   (b) During the life of this ORDER, the Bank shall notify the Regional Director and Commissioner in writing of any changes in the Bank's management. For purposes of this ORDER, "management" is defined as members of the board of directors and "senior executive officers," as that term is defined in section 32 of the Act ("section 32"), 12 U.S.C. § 1831(i), and section 303.14 of the FDIC Rules and Regulations ("section 303.14"), 12 C.F.R. § 303.14. Prior to the addition of any individual to the board of directors or the employment of any individual as a senior executive officer, the Bank shall comply with the requirements of section 32 and section 303.14.

   [.3] 3. As of the effective date of this ORDER, the Bank shall eliminate from its books, by charge-offs or collection, all assets or portions of assets classified "Loss" as of April 6, 1998, that have not been previously collected or charged off. Any such charged-off asset shall not be rebooked without the prior written consent of the Regional Director and Commissioner. Elimination or reduction of these assets with the proceeds of other Bank extensions of credit is not considered collection for the purpose of this paragraph.

   [.4] 4. (a) Within 30 days from the effective date of this ORDER, the Bank shall replenish its allowance for loan and lease losses ("ALLL") in the amount of at least $170,000.
   (b) Within 30 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to April 6, 1998, shall be amended and refiled if they do not reflect a provision for loan and lease losses and an ALLL which are adequate considering the condition of the Bank's loan portfolio, and which, at a minimum, incorporate the adjustment required by the above subparagraph of this ORDER.
   (c) Prior to submission or publication of all Reports of Condition and Income required by the FDIC after the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's ALLL, provide for an adequate ALLL, and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the findings of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of ALLL provided. In making these determinations, the board of directors shall consider the Federal Financial Institutions Examination Council's Instructions for the Reports of Condition and Income and any analysis of the Bank's ALLL provided by the FDIC.
   (d) While this ORDER is in effect, the Bank shall submit to the Regional Director and Commissioner the analysis supporting the determination of the adequacy of its ALLL. These submissions may be made at such times as the Bank files the progress reports otherwise required by the ORDER.
   (e) ALLL entries required by this Paragraph shall be made prior to any Tier 1 capital determinations required by this ORDER.

   [.5] 5. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate, adopt and implement a written profit plan and a realistic, comprehensive budget for all categories of income and expense for calendar years 1998 and 1999. The plan required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the Bank's overall earnings, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components. A copy of the plan shall be submitted to the Regional Director and Commissioner upon its completion.
   (b) The written profit plan shall address, at a minimum, the following:

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       (i) realistic asset growth and margin assumptions;
       (ii) realistic core deposit growth projections and strategies associated therewith;
       (iii) realistic funding strategies associated with the use of brokered deposits that address, among other things, limitations on the total amount of brokered deposits that the Bank can use in relation to total deposits, and sufficient documentation to show that the Bank's use of brokered deposits will have a positive impact of brokered deposits will have a positive impact upon earnings, liquidity and interest rate risk;
       (iv) maintenance of an adequate ALLL;
       (v) periodic salary review; and
       (vi) clear assignments of responsibilities for implementing these plans.
   (c) Prior to the end of each calendar quarter, the Bank's board of directors shall evaluate the Bank's actual performance in relation to the plan and budget required by this paragraph and record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors' meeting at which such evaluation is undertaken.

   [.6] 6. (a) Within 30 days, the Bank will develop and adopt a written plan ("Year 2000 Plan") for (a) assessing the Year 2000 status of all electronic information systems used by the Bank; (b) renovating as necessary all electronic information systems used by the Bank to make them Year 2000 compliant; and (c) validating those systems to ensure their full Year 2000 compliance. The Year 2000 Plan, at a minimum, will include the provisions set forth in this ORDER, the FFIEC's issuance of May 5, 1997, entitled "Year 2000 Project Management Awareness" and all other FFIEC issuances regarding the Year 2000 readiness and contingency planning ("FFIEC issuances").
   (b) Within 30 days from the effective date of this ORDER, the Bank shall perform due diligence reviews to determine whether the Year 2000 compliance procedures of its service providers and software vendors, and the time frames for implementation of those procedures, are adequate. The Bank's due diligence reviews shall be conducted in accordance with the FFEIC issuances.
   (c) Within 60 days of the effective date of this ORDER, the Bank shall develop a Remediation Contingency Plan, in accordance with the FFIEC issuances. The Remediation Contingency Plan shall set forth the Bank's alternate plans to assure continuity of operations in the event the Bank must retain Year 2000 compliant replacement internal mission critical systems, service providers or software vendors, or obtain Year 2000 compliant replacement computer hardware or software from alternate sources. Such Remediation Contingency Plan shall be provided to the Regional Director and Commissioner for their review and comment. The Bank's board of directors shall review any comments from the FDIC or the Commissioner and shall amend the Remediation Contingency Plan as necessary.
   (d) By December 31, 1998, the Bank shall implement an internal testing or verification process, in accordance with the FFIEC issuances, to establish that its service providers are Year 2000 compliant. Such testing shall be substantially completed by March 31, 1999. If a service provider is not Year 2000 compliant by June 30, 1999, the Bank will immediately implement the relevant provisions of its Remediation Contingency Plan.
   (e) Within 60 days from the effective date of this ORDER, and every 90 days there after, the Bank shall prepare a written assessment of the Bank's risk from Year 2000 noncompliance by the Bank's material customers' information systems. The written assessment shall be in accordance with the FFIEC issuances. The Bank shall use this assessment in its quarterly analysis of the risk in its loan portfolio, the adequacy of its allowance for loan and lease losses, and its liquidity position. The assessment shall be reviewed by the Bank's board of directors, and such review shall be recorded in the minutes of the Bank's board of directors meeting. The Bank shall develop and implement appropriate risk controls to manage and mitigate the risks posed by their customers' Year 2000 compliance status.
   (f) Within 60 days from the effective date of this ORDER, the Bank shall amend its internal and external audit policies to require periodic audits of the Bank's Year 2000 Plan and its implementation, in accordance with the FFIEC issuances. Thereafter, the Bank shall perform periodic audits of the Year 2000 Plan and its implementation. The results of the audits shall be reviewed by the Bank's board of directors, and such reviews shall be noted in the minutes of the board of directors meetings.

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   [.7] 7. Following the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish a description of this ORDER: (1) in conjunction with the Bank's next shareholder communication; and (2) 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, notice, or statement shall be sent to the FDIC in Washington, D.C. 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.

   [.8] 8. (a) Within 20 days from the effective date of this ORDER, the Bank's board of directors shall develop, adopt, and implement a program that will provide for monitoring of the Bank's compliance with this ORDER.
   (b) Following the required date of compliance with subparagraph (a) above, the Bank's board of directors shall review the Bank's compliance with this ORDER and record its review in the minutes of each regularly scheduled monthly board of directors' meeting.
   9. Within 15 days of the end of each calendar quarter following the effective date of this ORDER, the Bank shall furnish to the Regional Director and Commissioner written progress reports signed by each member of the Bank's board of directors, detailing the actions taken to secure compliance with the 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 Commissioner have, in writing, released the Bank from making further reports.
   The effective date of this ORDER shall be 10 days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and any successors and assigns thereof.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Pursuant to delegated authority.
   Dated September 22, 1998.

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