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FDIC Enforcement Decisions and Orders

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   [11,567] In the Matter of Mountain Community Bank, Los Alamos, New Mexico, Docket No. 98-087b (10-29-98)

   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.

   [.1] Loans—Repurchasing Restricted
   [.2] Assets—Adversely Classified Assets—Reduction Required
   [.3] Loans—Extensions of Credit—To Borrowers With Existing Adversely Classified Credits
   [.4] Loan Policy—Preparation or Revision of Policy Required
   [.5] Loans—Internal Review Procedure
   [.6] Capital—Increase Required
   [.7] Dividends—Dividends Restricted
   [.8] Management—Qualifications Specified
   [.9] Personnel—Review or Training Required
   [.10] Profit Plan—Preparation of Plan Required
   [.11] Violations of Law—Correction of Violations Required
   [.12] Technical Exceptions—Correction of Technical Exceptions Required
   [.13] Bank Operations—Internal Controls—Reviewed
   [.14] Reports of Condition and Income—Amendment Required
   [.15] Board of Directors—Committee to Review Compliance with Cease and Desist Order Required
   [.16] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of
MOUNTAIN COMMUNITY BANK
LOS ALAMOS, NEW MEXICO
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-98-087b

   The Mountain Community Bank, Los Alamos, New Mexico ("Bank"), through its board of directors, having been advised of its right to the issuance and service of 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) 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") dated October, 29 1998, 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 violated laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS ORDERED, that the Bank and institution-affiliated parties of the Bank cease and desist from the following unsafe or unsound banking practices and violations of laws and/or regulations:
   (a) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   (b) Operating the Bank without adequate supervision and direction by the board of directors over the management of the Bank;
   (c) Operating the Bank with an excessive level of adversely classified assets;
   (d) Operating the Bank with an inadequate level of capital protection, in relation to the character of the bank's assets and operations;
   (e) Engaging in hazardous lending and ineffective and lax collection ractices;
   (f) Operating the Bank without adequate written loan policies and procedures;
   (g) Operating the Bank in contravention of written loan policies and procedures;
   (h) Renewing or extending credit which is inadequately secured;
   (i) Renewing or extending credit without adequate and appropriate supporting documentation;
   (j) Purchasing loans or loan participations where such loans are not adequately documented or are of inferior credit quality;
   (k) Failing to accurately reflect the condition of the Bank in published statements and Consolidated Reports of Condition and Income;
   (l) Operating the Bank without adequate liquidity or proper regard for funds management;
   (m) Operating the Bank with a heavy reliance on short-term potentially volatile deposits as a source for funding longer-term investments;
   (n) Creating concentrations of credit as more fully set forth beginning on page 58 of the Report of Examination of the Bank dated March 23, 1998 (Examination);
   (o) Operating the Bank in violation of applicable Federal laws and regulations, as more fully set forth on page 26 of the Report of Examination of the Bank as of December 31, 1997.
IT IS FURTHER ORDERED, that the Bank take affirmative action as follows:

   [.1]1. The bank shall not repurchase any portion of any loans or loan pools it has sold, unless legally obligated to do so, if: (a) The loans or loan pools have been, or would have been, adversely classified at any examination conducted by the FDIC, the Financial Institutions Division, State of New Mexico, or an appropriate federal depository institution regulatory agency and remains classified by that agency as of the date of repurchase; or,

   (b) The loans or loan pools were included with those assets, approximating $21,000,000, which were sold during the course of the examination of March 23, 1998; or,
   (c) The loan or loan pool exhibits any of the following characteristics:

    (i) It is in nonaccrual status or should be in nonaccrual status as defined in the Instructions for the Preparation of Consolidated Reports of Condition or Income; or,
       (ii) The principal or interest payments are more than 30 days past due; or,
       (iii) The terms have been renegotiated or compromised due to the deteriorating financial condition of the borrower.

   [.2]2. (a) Upon the effective date of this ORDER, the Bank shall, to the extent that it has not previously done so, eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss and one-half of the assets classified Doubtful by the FDIC as a result of its Examination of the Bank. Reduction of these assets through proceeds of loans made by the Bank, or through exchanges with other entities, shall not be considered "collection" for the purpose of this paragraph.
   (b) Within 60 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") to reduce the remaining assets classified Substandard at the Examination. At a minimum, the plan shall include the following:
    (i) A schedule providing quarterly goals to reduce the remaining adversely classified assets at the Examination to levels representing not more than a specified percentage of total equity capital and reserves as reported each quarter by the Bank in its Consolidated Reports of Condition and Income and shall include no less than six consecutive quarterly target dates;
       (ii) An explanation showing the complete rationale used by the Bank in constructing the reduction schedule; and,
       (iii) A provision requiring, at a minimum, quarterly reviews by the Bank's board of directors whereby the extent of the Bank's compliance with the plan is expressly addressed, with the results of each review to be recorded in the corporate minutes of the board of directors.
   (c) Upon written notice from the Regional Director that the submitted plan is not acceptable, the Bank shall, within 30 days after receipt of such notice, submit amendments to the plan to the Regional Director, including any modifications or amendments requested by the Regional Director. Upon written notice that the plan is accepted, it shall be adopted by the board of directors of the Bank. The Bank shall then immediately initiate measures detailed in the plan to the extent such measures have not been initiated.
   (d) For purposes of the plan, the reduction of the level of adversely classified assets as enumerated in the Examination to a specified percentage of total equity capital and reserves may be accomplished by:
    (i) charge-off;
       (ii) collection;
       (iii) sufficient improvement in the quality of adversely classified assets so as to warrant removing any adverse classification, as determined by the FDIC; or
       (iv) increase of total equity capital and reserves.
   (e) While this ORDER is in effect, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as determined at any subsequent examination conducted by the FDIC or the State of New Mexico ("State") at such time as the report of examination is received by the Bank.

   [.3]3. (a) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has an extension of credit with the Bank that has been classified Loss, either in whole or in part, and is uncollected, or to any borrower who is already obligated in any manner to the Bank on any extension of credit, including any portion thereof, that has been charged off the books of the Bank and remains uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing credit already extended to a borrower after full collection, in cash, of interest due from the borrower.
   (b) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower whose extension of credit is classified Doubtful and/or Substandard, either in whole or in part, and is uncollected, unless the Bank's board of directors has signed a detailed written statement giving reasons why failure to extend such credit would be detrimental to the best interests of the Bank. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of director's meeting.

   [.4]4. Within 60 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies and procedures to provide effective guidance and control over the Bank's lending function. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director, as determined at subsequent examinations, and shall include, at a minimum, the following:
   (a) A requirement that the Bank shall not purchase loan participations until the Bank has obtained complete financial information and the participations are in full compliance with the Bank's lending policies and procedures;
   (b) Limitations on the volume of purchased loans in relation to capital, assets, and total loans.
   (c) Standards for extending credit to out-of-territory borrowers and limitations on such advances in relation to capital, assets and total loans;
   (d) Standards for extending credit to Bank directors, officers, shareholders and their related interests which take into account applicable Federal and State laws governing such extensions of credit;
   (e) A provision that deviations from the written lending policies and procedures require prior approval of the board of directors of the bank;
   (f) A requirement that extensions of credit shall not be refinanced, reworked or renewed unless current financial information and documentation have been obtained;
   (g) Standards setting forth appropriate limitations on concentrations of credit;
   (h) A requirement that all loans shall have written repayment understandings;
   (i) Standards under which unsecured loans may be granted;
   (j) Guidelines under which loans are renewed or have their due dates extended:

    (i) without full collection of interest thereon;
       (ii) by acceptance of separate notes in payment of interest;
       (iii) by capitalization of interest to the balance of the note;
   (k) Limitations on the amount advanced in relation to the value of the collateral securing the credit and the documentation required by the Bank for each type of secured credit;
   (l) A provision specifically outlining the collection procedures to be taken by the Bank when borrowers fail to make timely payments;
   (m) Guidelines for determining what rate of interest will be charged on all secured and unsecured loans; and
   (n) A provision outlining the documentation required on all secured loans.

   [.5]5. Within 60 days after the effective date of this ORDER, the board of directors shall establish a loan review committee to periodically review the Bank's loan portfolio and identify and categorize problem credits. The committee shall file a report with the board of directors. This report shall include the following information:
   (a) The overall quality of the loan portfolio;
   (b) The identification, by type and amount, of each problem or delinquent loan;
   (c) The identification of all loans not conforming to the Bank's lending policy.
   (d) The identification of all loans to officers, directors, principal shareholders of the bank or its holding company, or their related interests;
   (e) The identification of all loans exceeding $250,000 which are to borrowers, or secured by collateral, outside the bank's local trade area;
   At least 50 percent of the members of the loan review committee shall be directors not employed in any capacity by the Bank other than as a director.

   [.6]6. (a) Within 60 days after the effective date of this ORDER, the bank shall submit a written plan to the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") to increase its Tier 1 capital. The capital plan shall result in the bank achieving by March 31, 1999, and thereafter maintaining, an adjusted Tier 1 capital ratio, after establishing an adequate allowance for loan and lease losses, equal to or greater than 8.0 percent of the bank's adjusted total assets. After the Regional Director responds to the plan, the board of directors of the bank shall adopt the plan, including any modifications or amendments requested by the Regional Director. Thereafter, the Bank shall immediately initiate measures detailed in the plan, to the extent such measures have not previously been initiated to effect compliance.
   (b) If such ratio is less than 8.0 percent as determined at an examination by the FDIC or the State, the Bank shall, within 30 days after receipt of a written notice of the capital deficiency from the Regional Director, present to the Regional Director a plan to increase the Tier 1 capital of the Bank or to take other measures to bring the ratio to 8.0 percent. After the Regional Director responds to the plan, the board of directors of the Bank shall adopt the plan, including any modifications or amendments requested by the Regional Director. Thereafter, the Bank shall immediately initiate measures detailed in the plan, to the extent such measures have not previously been initiated, to increase its Tier 1 capital by an amount sufficient to bring the ratio to 8.0 percent within 60 days after the Regional Director responds to the plan. Such increase in Tier 1 capital and any increase in Tier 1 capital necessary to meet the ratio required by this ORDER may be accomplished by:

    (i) The sale of securities in the form of common stock; or
       (ii) The direct contribution of cash subsequent to the Examination by the bank's holding company;
       (iii) Any other method approved by the Regional Director and the Director;
   (c) If all or part of the increase in Tier 1 capital required by this ORDER 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 soliciting proxies and the voting of any shares or proxies owned 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 Federal securities laws. Prior to the implementation of the plan, and in any event, not less than 20 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 the materials by the FDIC shall be made prior to their dissemination. If the increase in Tier 1 capital is to be provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue shall be presented to the Regional Director for prior approval.
   (d) In complying with the provisions of this ORDER and until such time as any such public offering is terminated, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities written notice of any planned or existing development or other change which is materially different from the information reflected in any offering materials used in connection with the sale of the Bank's securities. The written notice required by this paragraph shall be furnished within 10 days after the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber who received or was tendered the information contained in the Bank's original offering materials.
   (e) In addition to the requirements of subparagraphs 9(a) and (b), the Bank shall comply with the FDIC's Statement of Policy on Risk-Based Capital found in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, App. A.
   (f) For the purposes of this ORDER the terms "allowance for loan and lease losses," "Tier 1 capital," and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively subsections 325.2(a), (t), and (u), 12 C.F.R. §325.2(a), (t), and (u). "Adjusted Tier 1 capital" and "adjusted total assets" shall be calculated according to the methodology set forth in the Analysis of Capital section in a report of examination of the FDIC.

   [.7]7. While this ORDER is in effect, the Bank shall neither declare nor pay, directly or indirectly, any cash dividend to shareholders without the prior written consent of the Regional Director. Approval for requests to pay dividends shall not be unreasonably withheld.

   [.8]8. The Bank shall have and retain qualified management. Within 30 days of the effective date of this Order, the Board shall assess the qualifications of each officer and director of the Bank, including the President and Chief Executive Officer, to determine overall management effectiveness and banking knowledge. At a minimum, the qualifications of each officer and director shall be assessed on his/her ability to:

    (i) comply with the requirements of the 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.
During the life of the ORDER, the Bank shall notify the Regional Director in writing of any changes in management. The notification must include the name(s) and background(s) of any replacement personnel and must be provided prior to the individual(s) assuming the new position(s).

   [.9]9. Within 30 days of the effective date of this Order, the Board shall study the adequacy of the Bank's lending officers and loan operation's staff. The study may be conducted by a qualified third party. Adequacy shall be determined both in terms of the number of officers and operation's staff as a whole and the qualifications of specific employees to perform necessary duties. The Board shall provide a copy of the findings of this study, including any recommended changes, to the Regional Director. The Board shall promptly accomplish any recommended staffing changes resulting from the study.

   [.10]10. Within 60 days of the date of this Order, the Board shall develop a written profit plan and submit it to the Regional Director. At a minimum, the plan shall address the following items:
   (a) The major areas in which the Board will seek to improve the Bank's operating performance;
   (b) A budget which incorporates realistic and comprehensive assumptions;
   (c) A budget review process which compares actual income and expenses with projections; and,
   (d) A description of the assumptions that support projected income and expense components.
   11. Within 60 days after the effective date of this ORDER, the Bank shall submit a plan to the Regional Director to reduce the concentrations of credit as enumerated beginning on page 58 of the Examination.

   [.11]12. After the effective date of this ORDER, the Bank, consistent with sound banking practices, shall eliminate and/or correct all violations of laws and/or regulations existing in the Bank as of March 23, 1998, as more fully set forth on page 26 of the Examination.

   [.12]13. Within 90 days after the effective date of this ORDER, the Bank, to the best of its ability using reasonable effort, shall eliminate and/or correct all technical exceptions with regard to loan documentation existing in the Bank as of March 23, 1998, as more fully set forth beginning on page 52 of the Examination.

   [.13]14. Within 60 days after the effective date of this ORDER, the Bank shall:
   (a) develop and implement methods for measuring the bank's sensitivity balance between investments and funding sources. The methods shall fully encompass the current business activities of the Bank, including the high turnover in the loan portfolio and the potential variations in cash flows thereon.
   (b) develop a plan to decrease the reliance of the Bank on short-term, potentially volatile liabilities for funding longer-term assets.
   (c) develop procedures enabling the board and management to monitor the Bank's liquidity position and maintain liquidity at an adequate level.

   [.14]15. Within 30 days after the effective date of this ORDER, the Board shall ensure that the March 31, 1998, Consolidated Reports of Condition and Income are reviewed. If necessary, these reports should be promptly amended to properly reflect the financial condition of the Bank.

   [.15]16. Within 30 days after the effective date of this ORDER, the board of directors shall establish a committee of the board of directors charged with the responsibility of ensuring that the Bank complies with the provisions of this ORDER. At least 50 percent of the members of such committee shall be directors not employed in any capacity by the Bank other than as a director. The committee shall report monthly to the full board of directors; and, a copy of the report and any discussion relating to the report or the ORDER shall be noted in the records of the board of directors. The establishment of this committee shall not diminish the responsibility or liability of the entire board of directors to ensure compliance with the provisions of this ORDER.

   [.16]17. After the effective date of this ORDER, the Bank shall send to its shareholder or otherwise furnish a description of this ORDER, (i) in conjunction with the Bank's next shareholder communication, and also (ii) 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 Unit, Washington, D.C. 20429, 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.
   18. Within 30 days after the end of the first calendar quarter following the effective date of this ORDER, and within 30 days after the end of each successive calendar quarter, 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 may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Bank in writing from making additional reports.
   19. The effective date of this ORDER shall be 10 days after the date of its issuance. This ORDER shall be binding upon the Bank and all institution-affiliated parties of the Bank. The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC. Pursuant to delegated authority.
   Dated at Dallas, Texas, this 29 day of October, 1998.

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