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[¶11,725] In the Matter of BYL Bank Group, Orange, California, Docket No. 00-070b (6-29-00)
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 4-24-02; see ¶16,312.)
[.1] Management—Qualifications Specified
[.2] Capital—Increase Required
[.3] Assets—Adversely Classified Assets—Reduction Required
[.4] Assets—Interagency Guidance on Asset Securitization Activities—Policy Required
[.5] Assets—Securitized Assets—Model Required
[.6] Profit Plan—Preparation of Plan Required
[.7] Violations of Law—Correction of Violations Required
[.8] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required
[.9] Interest Rate Risk Policy—Update Required
[.10] Reports of Condition and Income—Amendment Required
[.11] Dividends—Dividends Restricted
[.12] Brokered Deposits—Restricted
[.13] Shareholders—Disclosure of Cease and Desist Order Required
In the Matter of
BYL BANK GROUP
ORANGE, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-00-070b
BYL Bank Group, Orange, 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 June 7, 2000, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound 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;
(b) operating with inadequate capital in relation to the volume and quality of assets held by the Bank;
(c) operating with a large volume of assets, the value of which is inaccurate, excessive, and/or inadequately supported;
(d) operating with inadequate policies and procedures relating to the asset securitization function;
(e) operating with inadequate provisions for liquidity and funds management;
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(f) operating with inadequate interest rate risk policies and procedures;
(g) operating in such a manner as to produce low earnings; and
(h) operating in violation of Part 364 of the FDIC's Rules and Regulation, 12 C.F.R. 364, as more fully described on page 39 of the Report of Examination as of November 22, 1999; operating in contravention of the Joint Supervisory Statement on Investment Securities and End-user Derivative Activities, as more fully described on pages 40 and 41 of the Report of Examinations as of November 22, 1999; and operating in contravention of the Joint Agency Statement of Policy on Interest Rate Risk, as more fully described on pages 41, 42, and 43 of the Report of Examination as of November 22, 1999.
IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:
[.1] 1. (a) During the life of this ORDER, the Bank shall have and retain qualified management. 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 low quality assets, improving earnings, and other matters requiring particular attention. 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 Financial Institutions for the State of California ("Commissioner") in writing when it proposes to add any individual to or replace any member of the Bank's board of directors; employ any individual as a senior executive officer; or change the responsibilities of any senior executive officer, so that the person would assume a different senior officer position. The notification must be received at least 30 days before such addition, replacement employment, or change in responsibilities is intended to become effective and should include a description of the background and experience of the individual or individuals involved.
(d) The Bank may not add any individual to or replace a member of its board of directors, employ or change the responsibilities of any 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) No later than September 30, 2000, the Bank shall have and thereafter maintain Tier 1 Capital in such an amount as to equal or exceed seven and three quarters (7.75) percent of the Bank's total assets.
(b) No later than December 31, 2000, the Bank shall have and thereafter maintain Tier 1 capital in such an amount as to equal or exceed eight (8.0) percent of the Bank's total assets.
(c) No later than December 31, 2000, the Bank shall have and thereafter maintain a total risk based capital ratio in such an amount as to equal or exceed nine and one half (9.5) percent of the Bank's risk-weighted assets.
(d) No later than June 30, 2001, the Bank shall have and thereafter maintain a total risk based capital ratio in such an amount as to equal or exceed ten and a quarter (10.25) percent of the Bank's risk-weighted assets.
(e) No later than December 31, 2001, the Bank shall have and thereafter maintain a total risk based capital ratio in such an amount as to equal or exceed eleven (11.0) percent of the Bank's risk-weighted assets.
(f) The level of Tier 1 and total risk based capital to be maintained during the life of this ORDER pursuant to Subparagraphs 2(a) through 2(e) shall be in addition to a fully funded allowance for loan and lease losses, the adequacy of which shall be satisfactory to the Regional Director and Commissioner as determined at subsequent examinations and/or visitations.
(g) Any increase in capital necessary to meet the requirements of Paragraph 2 of this
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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, shareholders, and/or parent holding company; or
(iv) any other means acceptable to the Regional Director and the Commissioner; or
(v) the collection or sale of assets previously charged off; or
(vi) the reduction of assets classified "Loss" as of November 22, 1999, without loss to the Bank. Such reductions shall be acceptable to the Regional Director and the Commissioner; or
(vii) any combination of the above means. Any increase in capital necessary to meet the requirements of Paragraph 2 of this ORDER may not be accomplished through a deduction from the Bank's allowance for loan and lease losses.
(h) If any of the increase in 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 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 Commissioner of prior approval.
(i) 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.
(j) for the purposes of this ORDER, the terms "Tier 1 capital," "total assets," "risk-weighted assets" and "total risk based capital ratio" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. § § 325.2(t), 325.2(v), 325.2(q), and 325.2(w).
[.3] 3. (a) Within 10 days from the effective date of this ORDER, the Bank shall, for purposes of Consolidated Reports of Condition and Income, eliminate from its books, by charge-off or collection, all assets classified "Loss" as of November 22, 1999, 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) Additionally, while this ORDER remains in effect, the Bank shall, within 30 days of the receipt of any official Report of Examination of the Bank from the FDIC or the California Department of Financial Institutions, for purposes of Consolidated Reports of Condition and Income, eliminate from its books, by collection, charge-off, or other proper entries, the remaining balance of any assets classified "Loss" unless otherwise approved in writing by the Regional Director and the Commissioner.
[.4] 4. Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement policies to provide ef-
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fective guidance and control over the Bank's asset securitization function. Revisions to the policy shall include provisions to ensure full compliance with the Interagency Guidance on Asset Securitization Activities dated December 13, 1999. The revisions shall also establish the following requirements:
(a) The aggregate amount of the Bank's Spread Accounts, Interest-Only Receivables, and all other assets related to retained interests in asset securitizations (net of related booked tax liabilities), shall be no more than 100% of the Bank's total Tier 1 capital and reserves; and,
(b) No additional Spread Accounts, Interest-Only Receivables or other assets related to retained interests in asset securitizations shall be booked during the life of this Order without prior written consent of the Regional Director and the Commissioner.
[.5] 5. (a) Within 90 days from the effective date of this ORDER, the Bank shall obtain a model, developed by an independent third party, which will adequately value the Bank's retained interests related to securitized assets. The model shall be supported by adequate documentation to include a full description of all assumptions used in designing the model, and the basis therefore. In addition the model shall utilize reasonable, conservative valuation assumptions that can be objectively verified, to determine fair value. The Bank shall use the model beginning no later than September 30, 2000, and quarterly thereafter during the life of this ORDER, to record the value of its retained interests. The model, its assumptions, and implementation shall be acceptable to the Regional Director and the Commissioner.
[.6] 6. Within 60 days from the effective date of this ORDER, the Bank shall formulate and implement a written profitability plan. This plan 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.
The profitability plan and its implementation shall be acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
[.7] 7. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct to the extent legally possible all alleged violations of law and contraventions of Policy Statements which are more fully set out on pages 39–43 of the Report of Examination of the Bank as of November 22, 1999. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations, and Policy Statements.
[.8] 8. 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. Revisions to the policy shall address all deficiencies set forth in the FDIC's November 22, 1999 Report of Examination. Such 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/or visitations.
[.9] 9. Within 60 days from the effective date of this ORDER, the Bank shall develop or revise, adopt and implement policies and procedures for managing the Bank's sensitivity to Interest Rate Risk. The Bank's policy shall comply with the Joint Agency Statement of Policy on Interest Rate Risk, and the Joint Supervisory Statement on Investment Securities and End-user Derivative Activities. The policy and its implementation shall be acceptable to the Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
[.10] 10. Within 10 days after eliminating from its books any asset or portion thereof, in compliance with Paragraphs 3 and 4 of this ORDER, the Bank shall file with the FDIC amended Consolidated Reports of Condition and Income which shall accurately reflect the financial condition of the Bank as of December 31, 1998, for all call dates in
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1999, and for March 31, 2000. Thereafter, 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 California Department of Financial Institutions or FDIC examination of the Bank during that reporting period.
[.11] 11. The Bank shall not pay cash dividends without the prior written consent of the Regional Director and the Commissioner.
[.12] 12. During the life of this ORDER, the Bank shall not accept, renew, or rollover any deposits which meet the definition of brokered deposits set forth in part 337.6 of the FDIC's Rules and Regulations, without first receiving a "Brokered Deposit Waiver" from the FDIC.
[.13] 13. 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, 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.
14. 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. 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.
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.
Pursuant to delegated authority.
Dated at San Francisco, California, this 29th day of June, 2000.
