(This order was terminated by order of the FDIC dated 7-23-03; see ¶16,345.)
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.
[.1] Management—Qualifications Specified
[.2] Board of Directors—Increase Participation in Bank Affairs Required
[.3] Capital—Maintain Tier 1 Capital
[.4] Loan Loss Reserve—Establishment of or Increase Required
[.5] Assets—Adversely Classified Assets—Reduction Required
[.6] Loan Policy—Preparation or Revision of Policy Required
[.7] Strategic Plan—Preparation of Required
[.8] Profit Plan—Preparation of Plan Required
[.9] Violations of Law—Correction of Violations Required
[.10] Funds Management and Liquidity—Preparation or Revision of Funds
Management Policy Required
[.11] Bank Operations—Internal Routine and Control Procedures—Written Plan
Required
[.12] Dividends—Dividends Restricted
[.13] Brokered Deposits—Restricted
[.14] Interest Rates—Documentation of Required
[.15] Shareholders—Disclosure of Cease and Desist Order Required
{{9-30-03 p.C-5610}}
In the Matter of
SOUTHLAND BUSINESS BANK
IRWINDALE, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-02-156B
Southland Business Bank, Irwindale, California ("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 October 17, 2002, 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, 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 violations of law
and/or regulation:
(a) operating with inadequate management;
(b) operating with a board of directors which has failed to provide
adequate supervision over and direction to the active management of the
Bank;
(c) engaging in unsatisfactory lending and collection practices;
(d) operating with inadequate capital in relation to the kind and
quality of assets held by the Bank;
(e) operating with a large volume of poor quality loans relative to its
new bank status;
(f) operating with inadequate provisions for liquidity;
(g) operating with inadequate internal routine and controls policies;
and
(h) operating in such a manner as to produce operating losses.
IT IS FURTHER ORDERED, that the Bank, its institution-affiliated
parties, and its successors and assigns, take affirmative action as
follows:
[.1]1. The Bank shall have and 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 shall include a chief executive officer with
proven ability in managing a bank of comparable size, improving
earnings, and other matters needing particular attention. Management
shall also include a senior lending officer and chief financial
officer. The senior lending officer shall have significant appropriate
lending, collection, and loan supervision experience, and experience in
upgrading a low quality loan portfolio. The chief financial officer
shall have proven ability to manage the financial aspects of a bank of
comparable size, 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") in writing when
{{12-31-02 p.C-5611}}
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.
[.2]2. Within 30 days from the effective date of this ORDER, the board of
directors shall increase its participation in the affairs of the Bank,
assuming full responsibility for the approval of sound policies and
objectives and for the supervision of all of the Bank's activities,
consistent with the role and expertise commonly expected for directors
of Banks of comparable size. This participation shall include meetings
to be held no less frequently than monthly at which, at a minimum, the
following areas shall be reviewed and approved: reports of income and
expenses; new, overdue, renewal, insider, charged-off, and recovered
loans; investment activity; operating policies; and individual
committee actions. Board minutes shall document these review and
approvals, including the names of any dissenting directors.
[.3]3. (a) Within 180 days from the effective date 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. Thereafter, during the life
of this ORDER, the Bank shall maintain Tier 1 capital in such an amount
as to equal or exceed ten (10.0) percent of the Bank's total assets.
(b) Within 30 days from the effective date of this ORDER, the Bank
shall have and maintain a total risk based capital ratio, as defined in
Part 325.2(y) of the FDIC's Rules and Regulations, 12 C.F.R. 325.2(y),
of at least ten (10.0) percent.
(c) The level of Tier 1 capital to be maintained during the life of
this ORDER pursuant to subparagraph 3(a) 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 as determined at
subsequent examinations and/or visitations.
(d) Any increase in Tier 1 capital necessary to meet the requirements
of Paragraph 3 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; or
(v) any combination of the above means. Any increase in Tier 1 capital
necessary to meet the requirements of Paragraph 3 of this ORDER may not
be accomplished through a deduction from the Bank's allowance for loan
and lease losses.
(e) If all or part of the increase in Tier 1 capital required
by Paragraph 3 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, Accounting and Securities 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 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 for prior approval.
(f) In complying with the provisions of Paragraph 3 of this ORDER, the
Bank shall provide to any subscriber and/or purchaser of the Bank's
securities, a written
{{12-31-02 p.C-5612}}
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.
(g) 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).
[.4]4. Within 30 days from the effective date of this ORDER, the Bank shall
establish and thereafter maintain an adequate allowance for loan and
lease losses.
Additionally, within 60 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
allowance for loan and lease 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 allowance at least once each
calendar quarter. Said review should be completed within fifteen (15)
days of the end of each quarter, in order that the findings of the
board of directors with respect to the loan and lease loss allowance
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 allowance 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. Upon completion of the review, the
Bank shall increase and maintain its allowance for loan and lease
losses consistent with the allowance for loan and lease loss policy
established. Such policy and its implementation shall be satisfactory
to the Regional Director as determined at subsequent examinations
and/or visitations.
[.5]5. (a) Within 90 days from the effective date of this ORDER, the Bank
shall reduce the adversely classified assets identified in the Report
of Examination dated May 06, 2002, to not more than $400,000.
(b) Within 180 days from the effective date of this ORDER, the Bank
shall reduce the adversely classified assets identified in the Report
of Examination dated May 06, 2002, to not more than $300,000.
(c) Within 90 days from the effective date of this ORDER, the Bank
shall reduce the Special Mention assets identified in the Report of
Examination dated May 06, 2002, to not more than $700,000.
(d) Within 180 days from the effective date of this ORDER, the Bank
shall reduce the Special Mention assets identified in the Report of
Examination dated May 06, 2002, to not more than $500,000.
(e) The requirements of subparagraphs 5(a), 5(b), 5(c), and 5(d) 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 and Special Mention 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
paragraph 5 the word "reduce" means:
(i) to collect;
(ii) to charge-off; or
(iii) to sufficiently improve the quality of adversely classified or
Special Mention assets to warrant removing any adverse classification
or Special Mention designation, as determined by the FDIC.
[.6]6. (a) Within 30 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 take
all reasonable steps to obtain adequate and current documentation for
all loans in the Bank's loan portfolio. Such policies and their
implementation shall be in a
{{12-31-02 p.C-5613}}
form and manner acceptable to the Regional
Director as determined at subsequent examinations and/or visitations.
(b) The board of directors shall adopt procedures whereby officer
compliance with the revised lending and collection policies are
monitored and responsibility for exceptions thereto assigned. The
procedures adopted shall be reflected in minutes of a board of
directors meeting at which a quorum of all members are present and the
vote of each is noted.
[.7]7. Within 60 days of the effective date of this ORDER, the Bank shall
develop and submit to the Regional Director 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, 2002, December 31, 2003, and December 31, 2004. 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 as determined at subsequent
examinations and/or visitations.
[.8]8. Within 60 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 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.
[.9]9. Within 30 days from the effective date of this ORDER, the Bank shall
eliminate and/or correct all violations of law and contraventions of
policy which are more fully set out on pages 24 through 30 of the
Report of Examination of the Bank dated May 6, 2002. In addition, the
Bank shall take all necessary steps to ensure future compliance with
all applicable laws and regulations.
[.10]10. Within 30 days from the effective date of this ORDER, the Bank
shall develop or revise, adopt, and implement a written liquidity and
funds management policy. Such policy and its implementation shall be in
a form and manner acceptable to the Regional Director as determined at
subsequent examinations and/or visitations.
[.11]11. Within 30 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
as determined at subsequent examinations and/or visitations.
[.12]12. The Bank shall not pay cash dividends without the prior written
consent of the Regional Director.
[.13]13. Upon the effective date of this Order, the Bank shall not increase
the level of brokered deposits above the amount outstanding on that
date without the prior written approval of the Regional Director. For
purposes of this Order, the term "brokered deposits" shall have
the same meaning as defined in Part 337.6 of the FDIC Rules and
Regulations, 12 C.F.R. 337.6, and includes deposits obtained by
offering rates of interest which are significantly higher than the
prevailing rates of interest offered by other depository institutions
in the Bank's normal market area.
[.14]14. During the life of this ORDER, the Bank shall have and retain
adequate documentation to support the rate of interest offered on all
deposit accounts. This documentation shall include prevailing rate
surveys of market competitors in the Bank's normal market area.
Surveys should be updated at least weekly, or whenever the Bank makes a
change
{{12-31-02 p.C-5614}}
in the rate of interest offered on deposit accounts, whichever
occurs more frequently.
[.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
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,
Accounting and Securities Section, 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 50 days of the end of the first quarter following
the effective date of this ORDER, and within fifty (50) days of the end
of each quarter thereafter, the Bank shall furnish written progress
reports to the Regional Director 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 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 21st day of October, 2002.
