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{{10-31-92 p.C-2670}}
[¶10,633] In the Matter of American International Bank, Los Angeles, California, Docket No. FDIC-92-147b (8-26-92).
Bank to cease and desist from such unsafe or unsound practices as operating with inadequate capital; operating with an excessive level of poor quality assets; operating without adequate reserve for loan losses; following hazardous lending and lax collection practices; operating with an inadequate loan policy; operating with inadequate policies for liquidity and funds management; operating with inadequate liquidity; operating without proper internal routine and controls; operating with hazardous concentrations of credit; and operating with overstated earnings. (This order was terminated by order of the FDIC dated 12-22-98; see ¶16,208)
[.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] Concentrations of Credit—Policy Required
[.8] Asset/Liability Management—Written Policy—Minimum Requirements
[.9] Assets—Average Assets—Limitation on Increase
[.10] Bank Operations—Internal Routine and Controls—Written Policy Required
[.11] Dividends—Restricted
[.12] Shareholders—Disclosure—Cease and Desist Order
[.13] Real Estate Activities—Written Policy Required
[.14] Compliance Reports—Frequency
[.15] Institution—Affiliated Parties—Disclosure—Cease and Desist Order
In the Matter of
AMERICAN INTERNATIONAL
BANK
LOS ANGELES, CALIFORNIA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-92-147b
The Federal Deposit Insurance Corpora-
{{10-31-92 p.C-2671}}tion ("FDIC") issued to American International Bank, Los Angeles, California ("Bank"), a NOTICE OF CHARGES AND OF HEARING dated May 26, 1992 ("NOTICE") pursuant to Section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1). The NOTICE charges the Bank with having engaged in unsafe or unsound banking practices.
The Bank and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated August 7, 1992, whereby, solely for the purpose of this proceeding and without admitting the allegations in the NOTICE, 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. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED that the Bank, and any institution-affiliated party as such term is defined in Section 3(u) of the Act, 12 U.S.C. § 1813(u), cease and desist from the following unsafe or unsound banking practices:
(a) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Bank;
(b) operating with a large volume of poor quality loans and other assets in relation to total assets and total loans;
(c) operating with an inadequate loan valuation reserve;
(d) following hazardous lending and lax collection practices;
(e) operating with inadequate loan policies;
(f) operating with inadequate policies for liquidity and funds management;
(g) operating the Bank with inadequate liquidity;
(h) operating with routine and controls policies needing improvement;
(i) operating with excessive concentrations of credit; and
(j) operating with overstated earnings.
IT IS FURTHER ORDERED that the Bank 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, and experience in upgrading a low quality loan portfolio, improving earnings, and other matters needing particular attention. Management must also include a senior lending officer with significant appropriate lending, collection, and loan supervision experience and experience in upgrading a low quality loan portfolio. 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 ("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
{{10-31-92 p.C-2672}}the Regional Director issues a notice of disapproval pursuant to Section 32 of the Act, 12 U.S.C. § 1831i.
[.2] 2. (a) On or before December 31, 1992, the Bank shall increase Tier 1 capital by $500,000 or such an amount as is necessary to equal or exceed six and one-half (6.5) percent of the Bank's total assets. Further, on or before March 31, 1993, the Bank shall increase Tier 1 capital by $1,000,000 or such an amount as is necessary to equal or exceed six and three-quarter (6.75) 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 six and three-quarter (6.75) percent of the Bank's total assets; however, if after March 31, 1993, and during the life of this ORDER, Tier 1 capital shall fall below six and three-quarter (6.75) percent the Bank shall, within 30 days, develop a plan to restore Tier 1 capital in such an amount as to equal or exceed six and three-quarter (6.75) percent within an additional 60 days. Such plan shall be submitted to the Regional Director and the Superintendent for approval.
(b) Within 60 days from the effective date of this ORDER, the Bank shall develop and adopt a plan designed to aid the Bank in continuing to meet the minimum risk-based capital requirements as described in the FDIC Statement of Policy on Risk-Based Capital contained in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, Appendix A. The Plan shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations.
(c) 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.
(d) 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 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.
(e) 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, 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.
(f) 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 mate-
{{10-31-92 p.C-2673}}rially 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(m) and 325.2(n), as amended at 56 Fed. Reg. 10154, effective April 10, 1991.
[.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" as of November 18, 1991, 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 180 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of November 18, 1991 that have not previously been charged off to not more than $37,000,000.
(c) Within 270 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of November 18, 1991 that have not previously been charged off to not more than $30,000,000.
(d) Within 360 days from the effective date of this ORDER, the Bank shall have reduced the assets classified "Substandard" as of November 18, 1991 that have not previously been charged off to not more than $26,000,000.
(e) The requirements of Subparagraph 3(a), 3(b), 3(c), and 3(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 Subparagraphs 3(b), 3(c), 3(d), and 3(e), the word "reduce" means:
(i) to collect;
(ii) to charge-off; or
(iii) to sufficiently improve the quality of assets adversely classified or listed for Special Mention to warrant removing any adverse classification or criticism, 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" and is uncollected. Subparagraph 4(a) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with the Financial Accounting Standards Board Statement Number 15 ("FASB 15").
(b) 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 classified, in whole or part, "Substandard" without the prior approval of a majority of the board of directors or the loan committee of the Bank. Subparagraph 4(b) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with FASB 15, providing that such renewal or extension shall be made only with the prior approval of a majority of the board of directors or the loan committee of the Bank.
(c) In connection with Subparagraph 4(a) and 4(b) of this ORDER, the Bank shall not:
(i) continue the accrual of interest on any loan which is delinquent in principal or interest payments ninety (90) days or more unless the asset is both well secured and in the process of collection; or
(ii) shall not avoid the recognition of overdue loans and/or artificially inflate the income of the Bank. For any loans restructured in accordance with FASB
{{10-31-92 p.C-2674}}15, consideration should be given to the reasonableness of the modified terms of the loan, since loans should not be restructured in an attempt to conceal credit losses or delay their recognition.
(d) For the purpose of Subparagraph 4(c) of this ORDER, debt is "well secured" if it is secured by:
(i) collateral in the form of liens on or pledges of real or realizable value sufficient to discharge the debt (including accrued interest) in full; or
(ii) the guaranty of a financially responsible party.
A debt is "in the process of collection" if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status.
[.5] 5. Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policy to provide effective guidance and control over the Bank's lending function, which policy shall include 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 30 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 take steps to cause the implementation of 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 at least ten (10) days prior to 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 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 60 days from the effective date of this ORDER, the board of directors shall establish a policy setting parameters for acceptable types and amounts of concentrations of credit. Such policy and its implementation shall be satisfactory to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.
[.8] 8. Within 60 days from the effective date of this ORDER, the board of directors shall revise, adopt, and take steps to cause the implementation of a comprehensive liquidity and asset/liability management policy. The policy shall establish standards consistent with generally accepted prudent banking operations by giving specific consideration to:
(a) 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 twenty (20.0) percent and which ratio shall within 270 days from the effective date of this ORDER be reduced to not more than fifteen (15.0) percent. The requirements of this Paragraph shall not be construed as standards for future operations, and the Bank's volatile liability dependency ratio shall be maintained at a level consistent with prudent banking practices;
(b) establishing a range for short-term
{{5-31-93 p.C-2675}}investments in relation 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";
(c) establishing maturity ranges for the Bank's investment portfolio;
(d) establishing acceptable ranges for the Bank's rate sensitivity and gap ratios; and
(e) delineation of the asset/liability committee's 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.
[.9] 9. During the life of this ORDER, the Bank shall not increase its average assets by seven and one-half percent (7½%) or more during any three (3) months period without receiving the prior written approval of the Regional Director and the Superintendent. The approval shall be requested at least thirty (30) days in advance of the period during which the Bank intends to exceed the seven and one-half percent (7½%) growth restriction.
[.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement appropriate revisions to Bank policies for the operation of the Bank in such a manner as to provide internal routine and control policies consistent with safe and sound banking practices. Such revisions shall provide for the correction of all deficiencies cited in the Report of Examination as of November 18, 1991, and its implementation shall otherwise be satisfactory to the Regional Director and the Superintendent as determined at subsequent examinations and/or visitations.
[.11] 11. The Bank shall not pay cash dividends in any amount except as follows:
(a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations;
(b) that after payment of such dividends, the Tier 1 capital of the Bank will be not less than six and three-quarter (6.75) percent of the Bank's total assets, and the reserve for loan losses shall be at an adequate level;
(c) that such declaration and payment of dividends shall be approved in advance by the board of directors; and
(d) that such declaration and payments of dividends shall be approved in advance, in writing, by the Regional Director and the Superintendent, which approval shall not be unreasonably withheld.
[.12] 12. 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, 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.
[.13] 13. (a) Within 60 days from the effective date of this ORDER, the board of directors shall revise, adopt, and take steps to cause the implementation of a written policy governing the Bank's real estate investment activities. The policy shall be in a form and manner acceptable to the Regional Director and Superintendent as determined at subsequent examinations and/or visitations.
(b) During the life of this ORDER, the Bank shall furnish to the Regional Director a copy of any application to the Superintendent filed pursuant to Section 751.3 of the California Financial Code, Cal. Fin. Code § 751.3 (West 1989), to engage in real estate activities. This copy of such application shall be furnished to the Regional Director on or before the date of its filing with the Superintendent. In no event shall the Bank engage in any real estate activities (excluding all activities in relation to its current portfolio) which are the subject of any such application filed pursuant to Section 751.3 of the California Financial Code without the prior written consent of the Regional Director.
[.14] 14. Within thirty (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
{{5-31-93 p.C-2676}}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.
[.15] 15. Following the effective date of this ORDER, the Bank shall send to or otherwise furnish a description of this ORDER to all individuals or entities that are both (a) institution-affiliated parties as such term is defined in Section 3(u) of the Act, 12 U.S.C. § 1813(u), and (b) employed by the Bank as counsel, auditor or consultant in connection with the Bank's efforts to negotiate, interpret or comply with the terms of the ORDER. The description shall fully describe the ORDER in all material respects.
The provisions of this ORDER shall be binding upon the Bank, any institution-affiliated party as such term is defined in this Paragraph, and the Bank's successors and assigns.
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. This ORDER shall be terminated by the FDIC upon a finding that the Bank is in substantial compliance with its terms.
Dated at San Francisco, California, this 26th day of August, 1992.
Pursuant to delegated authority.
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