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FDIC Enforcement Decisions and Orders

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   [12,121] In the Matter of Western State Bank, Duarte, California, Docket No. 03-200b (11-7-03).

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent was engaged in unsafe and unsound practices.

   [.1] Management—Qualifications Specified

   [.2] Violations of Law—Corrections of Violations Required

   [.3] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required

   [.4] Investments and Investment Policy—Investment Policy—Preparation or Revision Required

   [.5] Bank Secrecy Act—Compliance

   [.6] Suspicious Activity Report—Implement Policy

   [.7] Shareholders—Disclosure of Cease and Desist Order Required

   [.8] Progress Report—Written Report Required

In the Matter of
WESTERN STATE BANK
DUARTE, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-03-200b

   Western State Bank, Duarte, 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 November 5, 2003, 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:
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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 management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;

       (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) operating in violation of section 323.3 of the FDIC's Rules and Regulations, 12 C.F.R. §323.3, as more fully described on page 45 of the Report of Examination as of March 17, 2003; operating in violation of section 323.4 of the FDIC's Rules and Regulations, 12 C.F.R. §323.4, as more fully described on pages 45 through 46 of the Report of Examination as of March 17, 2003; operating in violation of section 323.5 of the FDIC's Rules and Regulations, 12 C.F.R. §323.5, as more fully described on pages 46 through 47 of the Report of Examination as of March 17, 2003; operating in violation of 31 C.F.R. §103.21(a)(2)(ii) as more fully described on page 47 of the Report of Examination as of March 17, 2003, operating in violation of 31 C.F.R. §103.22(c)(2) as more fully described on pages 47 through 48 of the Report of Examination as of March 17, 2003; and operating in contravention of Interagency guidelines and policy statements as more fully described on pages 48 through 54 of the Report of Examination as of March 17, 2003;

       (d) operating with inadequate provisions for liquidity;

       (e) operating with inadequate internal routine and controls policies; and

       (f) 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 including a chief financial officer.

       (a) The chief financial officer shall have proven ability and experience in that role in the financial services industry in the United States of America in an institution of comparable size;

       (b) The chief financial officer shall have demonstrated ability in areas including, but not limited to, accounting, regulatory reporting, budgeting and planning, management of the investment function, liquidity management, and interest rate risk management; and

       (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 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 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and contraventions of interagency guidelines and policy statements which are more fully set out on pages 45 through 54 in the FDIC's Report of Examination as of March 17, 2003. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws, regulations and applicable guidelines and policy statements.

   [.3] 3. 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. 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. At a minimum such corrective means shall include:

       (a) Obtaining training on liquidity management for the Board of Directors, sufficient to be able to understand and discuss the results of the bank's liquidity monitoring reports;

       (b) Documenting the Board's discussions of liquidity issues in meeting minutes;

       (c) Management will take action to ensure that the institution remains within Board-approved liquidity parameters;

       (d) Management will report all Liquidity Policy exceptions to the Board, and the


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       Board will review any exception(s) to policy parameters and note whether it approves of the exception(s);

       (e) Management will initiate analysis of projected sources and uses of funds for near term time periods to facilitate funding with cost efficient, less volatile funding sources;

       (f) The Board will establish limits on the volume of deposits obtained from out of its market area, through Internet posting or solicitation, and other deposits obtained at rates higher than those prevailing in its local marketplace;

       (g) Management shall establish and implement a policy whereby all deposit pricing decisions shall be documented in writing;

       (h) Management shall develop and implement a liquidity contingency plan; and

       (i) The Board shall have a periodic independent review of the bank's liquidity management process and compliance with policies and procedures performed. Such review shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations and/or visitations. The first such reviews will occur within 90 days of the effective date of this Order, and a copy of the review will be provided to the Regional Director within 7 days of receipt by the Board.

   [.4] 4. Within 45 days of the effective date of this ORDER the Bank shall revise the institution's Investment Policy to address the deficiencies described in the March 17, 2003 Joint Report of Examination on page 41. At a minimum, such policy shall address providing guidance on internal controls, audit/independent review, and due diligence required on brokers. 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.

   [.5] 5. Within 60 days from the effective date of this ORDER, the Bank shall implement the following regarding Bank Secrecy Act compliance:

       (a) The Board shall establish and implement systems and controls to ensure that all required and appropriate Suspicious Activity Reports are filed within the time frames specified in the Treasury Department's financial recordkeeping regulations; and

       (b) The Board shall establish and implement systems and controls to ensure that all required and appropriate Currency Transaction Reports are filed within the time frames specified in the Treasury Department's financial recordkeeping regulations.

   [.6] 6. Within 60 days from the effective date of this ORDER, the Bank shall establish and implement policies and procedures to advise the Bank's Board of Directors of significant Suspicious Activity Reports. At a minimum, the Board of Directors shall be advised in detail of all Suspicious Activity Reports involving employees, contractors, officers and directors. The policies and procedures shall also include guidelines to determine what Suspicious Activity Reports are significant.

   [.7] 7. 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.

   [.8] 8. 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, Department of Financial Institutions for the State of California 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.
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   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 7th day of November, 2003.

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Last Updated 2/7/2004 legal@fdic.gov